ABOUT NCAER

The National Council of Applied Economic Research (NCAER) was formally inaugurated by the President of India, Dr Rajendra Prasad, on December 18, 1956. Accordingly, 2006-07 saw the commemoration of the Council's Golden Jubilee. The Council is an independent institution, run by the Governing Body on behalf of the General Body to support both the government and the private sector through empirical socioeconomic research. The bulk of the Council's revenue comes from studies done on contract for clients in government, the development community and in the private sector. The NCAER work programme is currently divided into four broad research areas:

• Growth, Trade and Economic Management
• Investment Climate, Physical and Economic Infrastructure
• Agriculture, Rural Development and Resource Management
• Household Behaviour, Poverty, Human Development, Informality and Gender

A broad theme that permeates the Council's current research activities is the progress of India's economic reform programme and its impact on agriculture, industry and human development.

Today, NCAER has links with major policy research institutions and universities outside India including the National Bureau of Economic Research, Cambridge,MA; the Brookings Institution,Washington DC; the Centre for Economic and Policy Research, London; the University of Maryland, College Park, MD;Oxford University; and the Institute of Applied Economic Analysis (IPEA), Brazil.

ABOUT NATIONAL HOUSING BANK

National Housing Bank (NHB), the apex financial institution for housing in India, wholly owned by the Reserve Bank of India was established in 1988 under an Act of Parliament to function as a principal agency to promote Housing Finance Institutions and to provide financial and other support to such institutions. NHB over the last two decades of its existence has been engaged in building a sustainable and inclusive housing finance system. NHB is committed to working towards the national goal of "Affordable Housing for All", with focus on unserved and under served.

NHB has undertaken various initiatives towards knowledge gathering; analytical studies; organising seminars/conferences; capacity building programmes for market players, policy makers, professionals; dissemination through Occasional and Discussion papers; on general and specific issues pertaining to the housing and housing finance sector.

NHB's activities cover a triad of functions - regulation and supervision of Housing Finance Companies; promotion and development; and financial assistance to housing financing institutions and others. Over the years, NHB has pioneered a number of new initiatives such as the Golden Jubilee Rural Housing Finance Programme, mortgage backed securitisation, finance for natural disaster affected housing, housing microfinance, reverse mortgage loan, residential property price index by the name of NHB Residex, Rural Housing Fund for the weaker sections in rural areas. In addition NHB has contributed extensively to public policy formulation in housing and housing finance.

Price Structure of Housing Properties

Study Sponsored by
National Housing Bank, New Delhi

National Council of Applied Economic Research
11 I.P. Estate,New Delhi - 110 002 (INDIA)

© National Council of Applied Economic Research, 2009
© National Housing Bank, 2009

All rights reserved, no part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise, without the prior written permission of the publisher.

Published by
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STUDY TEAM

Principal Investigator
Ch. Sambasiva Rao
Team
Shashanka Bhide
D.B. Gupta
Kiran Wadhva
K.A. Siddiqui
Shibananda Nayak
Kiran Sheokand

PREFACE

With the acceleration in the pace of economic growth, the last decade and a half has also witnessed sharp rise in housing construction activity, particularly in urban India. Construction activity has accelerated in the case of both residential and commercial properties. Both demand and supply of housing appears to have been catalysed by the rise in channels for accessing housing finance. These developments have, however, also brought into focus several weaknesses in the system. The high costs of buying and selling the property (the high transaction costs) are increasingly seen as impediments to the efficient functioning of the housing markets.

By raising the final price these primary and secondary costs can act as a significant deterrent for the development of housing markets. High transaction costs exacerbate housing shortages by adding to the overall cost of housing. Transaction taxes of various kinds, in general not only induce misallocation in the housing market, but have consequences for misallocation in other markets as well. For example, high property transaction costs are known to lead to road congestion, leading to the failure of road policies, as density of population per unit area may increase in an unplanned manner.

From a variety of perspectives, an understanding of the transaction costs in the case of housing properties is important in the development of the housing sector. The National Housing Bank commissioned NCAER (the Council) to undertake a study to estimate various components of transaction costs in respect of both residential and commercial housing properties in the rural and urban areas of India. The study is based on an analysis of the data obtained from a sample survey of property dealers, developers, housing finance companies, and select nationalised banks in the 16 major states and 45 cities of the country.

The study has also carried out a comprehensive review of the fiscal and legislative framework within which transactions in housing properties take place in the country. The review suggests a need to examine

policies that influence the 'returns to investment' in housing, especially from the viewpoint of the availability of housing for the poor. As far as the estimates of transaction costs are concerned, it is seen that these are almost 10% of the value of property, with stamp duty constituting almost 65-70% of the total transaction cost. The study also finds that the transaction cost as a proportion of the value of the property tends to be somewhat higher in the so-called 'economically weaker states' when compared to those in the 'better off states'.

The study has provided some important suggestions and recommendations, and it is hoped that the study would lead to further work to monitor the impact of transaction costs in housing markets.

We gratefully acknowledge the financial support provided by the NHB and for their constant interactions with the study team. Mr. S. Sridhar, CMD, National Housing Bank took personal interest during the course of the study, and offered many useful suggestions. Mr. P.K. Kaul and Mr. Vishal Goyal from NHB were always available for support. Their contribution in the conduct of the study is deeply appreciated.

FOREWORD

Housing is a basic need for all human beings across the income spectrum. Housing is twice blessed–at the individual in terms of improving their quality of life and at the macro level in terms of capital formation by boosting household savings, backward and forward linkages with other sectors. Home ownership has emerged as an individual and a social goal in our country. Housing brings financial security constituting as it does for low and middle income Indians their most valuable asset. In addition, it generates emotional and psychological well being. As it is said, housing is a verb and not a noun.

As the apex financial institution for housing, National Housing Bank (NHB) is committed to contribute to research, analysis and informed debate on housing and housing finance issues. As part of NHB's research and knowledge dissemination initiatives, the Bank commissioned the National Council of Applied Economic Research (NCAER) to carry out a study to analyse the various components of housing property prices as well as determine their importance vis-a-vis the total cost of the housing property. The study examined residential, commercial property prices and transactions in the rural and in the urban areas, separately. NHB had earlier conducted an in-house study on "Transaction Costs of Housing in India–an Analysis" which was published as an Occasional Paper.

The residential housing property segment constitutes a major component of the real estate market in India in terms of value. Housing properties have been experiencing high appreciation of capital value in recent years. The sector is marked by a variety of taxes and regulations with government policies relating to interest rates, subsidies, levies and other taxes having a significant impact on housing property market. The transaction costs on housing include taxes and duties that must be paid before the ownership of the property is transferred and also the services that are incidental to the process of acquisition of the property. Currently, transaction costs constitute almost about 10% of the total price of the property. In order to bring in greater transparency into the housing property market as also to contain transaction costs to the minimum it is necessary to understand their pricing structure. The NCAER study makes a significant contribution in this regard. The publication and wider dissemination of this study will hopefully generate a debate on this important issue.

I hope that the study will be useful to Government, the real estate industry, banks, housing finance companies, other financiers, and academia as well as to individual buyers.

LIST OF TABLES

LIST OF FIGURES

LIST OF ANNEXURE TABLES

LIST OF ACRONYMS

CONCEPTS AND DEFINITIONS

TRANSACTION RELATED CONCEPTS

Transaction Costs: Transactions costs are the resources to be spent in order to transfer, establish, and maintain property rights. Generally, buyer incurs them. These costs are divided as the ones payable to the Government and payable to the professionals.

Stamp Duty: Stamp duty is the tax collected by the Government on every document by which any right, title, interest or liability is created, transferred, extended, extinguished or recorded. Generally rebates are given for various types of buyers like women, etc.

Registration Fee: This fee is imposed by the Government for registering the 'Sale Deed' with the Registrar of Assurances to protect and safeguard the interest of the intending purchaser/transferee.

Land Conversion Charges: These are the charges for converting leasehold property to free hold.

Leasehold Properties: A form of property title, which gives the holder the right to use or occupy, but not to sell or transfer the property. Leasehold properties are not freely transferable. Depending upon the conditions of the lease deed, prior permission of the lessor (DDA/LDO) is required to transfer the property. One is required to pay conversion charges towards administration and the unearned increase in property prices.

Freehold Properties: It is a property in which titleholder has rights to transfer the property by registration of sale deed.

Transfer & Mutation Charges:Transfer charges are incurred for transfer of property and notifying the same in the concerned municipal authority records known as Mutation / Katha Records. The charges vary from city to city.

Brokerage Charges:When a property transaction is facilitated by a real estate broker, he charges a commission that generally is in the form of percentage of value of that transaction. This varies across properties and cities.

Document Preparation Charges: These are the charges payable to the notaries, advocates for preparing the title documents and are collected on a lump sum basis. The higher the value of transaction, the greater is the documentation charges.

Due Diligence/Lawyer Fee: These are the charges payable for verifying the legal aspects of the property title. A careful examination of every aspect of a proposed asset purchase or lease is reviewed including indepth financial, legal and physical investigations.

Society Transfer Fee: In a co-operative society, every owner is considered a shareholder, while the society actually (legally) owns the property. The seller's share in the co-operative society will be transferred to the
buyer.

Average Duration of a Transaction: Duration of the transaction is defined as the period that spans between the 'Agreement to Sell' and 'Sale Deed' execution.Time is a resource. Therefore, time taken to complete the transaction is an important transactions cost.

Financing items:

Finance Costs: Finance costs come into the picture if the buyer borrows funds for buying a property. This information is available with the HFCs and Banks that finance individual transactions.

Amount of Loan: Amount borrowed excluding the insurance cost.

Application Fee Administrative & Processing Charges: These are one time charges levied by the financier upfront. Application fee is fixed nominal cost amount. The administrative and processing fee is a percentage of the amount of loan required. These are waived off sometimes.

EMI: Equated Monthly Installment is a fixed amount made by a borrower to a lender in each calendar month. EMI is calculated to pay off both interest and principal each month, so that over a specified number of years, the loan is paid off in full.

Pre EMI: The amount charged for the period that falls between loan disbursement and beginning of payment of EMI.

Loan Interest Rate: Rate of interest on the loan amount. It is in terms of Rupees per 100 per year.
Legal Charges: Charges collected by finance company towards recovery of the amount paid by it to its legal expert for advising it on the particular transaction.

Valuation Fee: Normally included in the processing fee. However, at times financier charges separately for valuation of the property by a valuer.

Insurance Charges: Insurance coverage of the property financed. It is usually a lump sum payment that is charged basing on the value of the property.

CAPITAL ITEMS

Land cost: Cost of the land or apportioned cost of land in case of a flat. It varies significantly from place to place within a city itself.

Infrastructure Cost: Cost of development of the basic infrastructure within the premises. Depends upon the extent of work and specifications.

Construction Cost: Basic cost of the property. Costs can vary significantly depending upon area, specifications of materials, finishing, etc.

Parking Lot Cost: A lumpsum payment charged towards provision of dedicated space for parking the vehicle.
This can either be included in the cost of the property or charged separately. It varies across localities and cities.

Cost of Ground water Provision: Charges levied by the builder towards provision of ground water facility.
This includes the cost of rainwater harvesting as well in some places.

Cost of Municipal Water Facility: Amount charged by the builder for providing the infrastructure required for providing water supply from the local body. This includes the cost of water meter.

Electricity Charges: Amount charged by the developers towards installing necessary infrastructure required for getting supply from electricity distribution company.They also include the cost of providing power back
up (generator).

Solar Energy Provision: Of late, it has become mandatory to provide solar energy in housing properties.
The cost of procuring and installing solar energy equipment is to be obtained.

External Development Charges: These are costs involved in development of infrastructure outside the premises of the property. These costs primarily include amounts spent on basic infrastructure amenities
such as drainage, roads, sewage, water, electricity etc.

Other Capital Costs: Some builders charge separately towards provision of necessary furnishings such as wardrobes, kitchen cabinet, pelmets including fitting and fixtures etc. The houses cannot be taken for occupation without these investments. Developers in some cities charge a lump sum amount from property buyers for creating a corpus fund required for meeting necessary maintenance expenses. 'Other capital costs' should capture all such payments made upfront while buying the property.

(Source: National Housing Bank (2008),Transaction Costs of Housing in India: An Analysis, Occasional Paper No. II,New Delhi.)

1. INTRODUCTION

1.1 BACKGROUND

There are many unique characteristics of housing distinguishing it from other goods. It is a universal necessity. Home ownership is a social goal, bringing social status to the buyer. Housing is also a relatively expensive asset, often soaking up a lifetime's savings. The supply of housing is inelastic and hence housing prices respond to demand changes. Housing properties have a downward sloping demand curve, which means that less people would effectively buy when prices are high and vice versa. At high prices, buyers postpone their buying decisions and opt for rented accommodation. At low prices, people often purchase more than one house. Disposable incomes determine purchasing power.Government policies relating to interest rates, mortgage subsidies and other taxes also impact the housing property market.

The sector is marked by a variety of taxes and regulations. These are meant to ensure the safety of houses for occupation and to confer rights of ownership to enable further transactions. Given that building or acquisition of a house usually involves several intermediary agents (either statutory like registration of various title documents or facilitating agents such as brokers, builders or financiers), the final cost of acquisition includes not just the price of the property that is paid to the seller (in case the property is purchased) but also all the intervening transaction costs (TC).

One of the major problems that both buyers and sellers experience is high TC. It also substantially pushes up property prices. Besides, high TC may also result in understating the values of housing to avoid taxes, thus resulting in revenue loss.When the 'middleman' or other 'intermediaries' are involved in such transactions, their fees also add to the TC.

The 'price of the property' to the buyer, therefore, includes the TC as well as the cost of construction and other amenities that go with the house. Here,TC include taxes and duties that must be paid before the ownership of the property is transferred and also the services that are incidental to the process of acquisition. An important component of the TC, stamp duty, constitutes 7–10 per cent of the value of the transaction. The costs associated with the search for the house, often done through the property agents and charged as 'broker's fee or 'legal services' or 'documentation processing fee' and so on, could often work out to be quite significant.

The TC, as well as the price of the property, are expected to vary. However, as housing regulations fall within the jurisdiction of state governments and municipalities, variations in TC may be significant across states and even cities within states.

Given the significance of the TC in the housing property markets, an understanding of the extent of these costs is important in the development of policies for the housing sector.

As for the housing property market in India, the residential housing property segment constitutes about 75 per cent of the real estate market in terms of value. Real estate development activity has shifted from metros to their suburbs and tier-two cities. A gradual shift to tier-three cities and rural areas is taking place. Easy availability of finance from the housing finance companies and commercial banks at lower interest rates, increased salaries and availability of fiscal and tax benefits are propelling the demand for housing properties. The growth of the Information Technology Enabled Services (ITES), industry has been a significant contributor of housing property demand in recent years ITES firms are moving from traditional centres like Mumbai, Delhi, Bangalore, Hyderabad and Chennai to the National Capital Region, Pune, Chandigarh, Jaipur, etc. in order to be cost effective. This is resulting in not only the boom in residential property markets but also in the institutional property markets of these cities. There is great demand for modern office buildings and commercial spaces in India.

The National Housing Bank (NHB) commissioned the National Council of Applied Economic Research (NCAER) to carry out a study to analyse the various components of housing property prices as well as determine their importance vis a vis the total cost of housing property. As there are inherent differences in the housing market for residential, commercial and institutional properties, the analysis proposes to examine the various types of properties separately. It would also examine transactions in the rural and in the urban areas separately.

1.2 OBJECTIVES

Therefore, the overall aim is to develop a template for the structure of housing property–residential and commercial; urban and rural. The specific objectives set out by NHB are:

• To develop a template for the structure of total price of housing property–residential and commercial for both urban and rural areas in the country.
• To map the process of various activities in real estate/ housing purchase/ construction.
• To examine the existing status of legal and taxation issues such as stamp duty on properties, charges on registration of mortgages, registration charges, stamp duty on instruments of securitisation and other legal and taxation levies/ charges, etc.
• To suggest arguments favouring measures for improving the efficiency in the above areas with a view to ensuring orderly development of the housing/ real estate finance market.

Thus, the study would contribute to better understanding of housing property markets. The study would provide a basis for devising measures for cost reduction in real estate property transactions . The study also helps to understand the efficiency of the institutional framework pertaining to housing property
markets in India.

1.3 REPORT STRUCTURE

Chapter 2 provides a brief review of the major taxation and legislation policies relating to housing . This chapter also provides an analytical assessment of the likely impact of various taxation policies, legal charges and legislative policies on housing sector.

In Chapter 3, description of the overall methodology employed in this study is outlined. The study has relied on specially collected primary data to assess the structure of housing prices. The approach to the collection of this data is also discussed in the section on methodology.

Chapter 4 of the report presents the structure of housing properties as estimated from the survey

The concluding chapter of the report provides a summary of key findings and recommendations.

2. REVIEW OF TAXATION AND LEGISLATIVE POLICIES IN THE HOUSING SECTOR

There are two major models of housing construction in India. First, by individuals for their own use and second by builders/developers who build houses as a business activity for sale1.Till about a decade back, most of housing was constructed or got constructed by individuals on their own (or with the help of contractors) on plots purchased from developers for self-use. The latter model has increasingly replaced this. Taxation and legal fees in the two models differ only slightly.

2.1 PRODUCTION OF HOUSING AND TAXATION

2. 1.1 Acquisition of Land

The process of production of residential properties starts with the acquisition of land by the builder. Prior to this, the developer would normally carry out due-diligence for revenue/title search to ensure that the title is 'clean' and there are no encumbrances on the land. The title search is done by solicitors for a fee. This is not a legal charge imposed by the government but nevertheless forms part of the TC. This search is necessitated because there is no system of certification of title by the State in India. The State prepares and maintains land records mainly for the purpose of collecting revenue. The person who is liable to pay the tax is the presumed owner. But, entries in the land records are not conclusive and can be challenged in a court of law. It is legally required that all transactions in land have to be registered. But, the law provides only for registration of the deed document. As a result, the title is often not registered. "Therefore, a deed does not in itself prove title; it is merely a record of an isolated transaction. It shows that a particular transaction took place, but it does not prove that the parties to the transaction were legally entitled to carry out the transaction and therefore does not uphold the validity of the transaction. It is left exclusively to the person entering into transaction concerning an immovable property to investigate about the soundness of the title of that property" (D.C.Wadhva: 2002). This is a serious lacuna in our legal system, which has raised the cost of land transaction substantially2.

1. There are two other important models namely cooperative model and housing produced by public housing agencies. These are not covered in this paper.
2. Carrying out due diligence can at times cost as much as registering the property. The Jawaharlal Nehru National Urban Mission (JNNURM) incentivises the State
Government to take up titling of land making it a necessary condition for availing of funds under the Mission. Some states like Rajasthan, Andhra Pradesh and
Karnataka have already taken up the task of directly or indirectly guaranteeing title in urban areas with the objective of making property transactions easier and
reduce or prevent most such deals from landing in courts. (Mint No. 13, 2007, p.1).

2. 1.2 Post-acquisition Legal Charges and Taxes

On acquiring the land, the developer would get the land registered in his (or company's) name on payment of registration charges. As per Section 17 of the Registration Act 1908, a sale deed in respect of an immovable property whose value is more than Rs 100 is to be compulsorily registered. The registration is to be carried out within four months of date of execution of the sale. If the sale is not registered within the stipulated period, the law will not recognise the sale and ownership would not (legally) pass in the hands of the buyer3.

Stamping of property documents is an essential part of the registration process. As per Article 23 of Schedule I of the Indian Stamp Act, 1899 a sale deed is to be stamped as a conveyance (transactions of sale). Stamp duty is payable on the basis of value of land/property as stated in the sale-deed4. The stamp duty rates vary over states (See Table A2.1 in Annexure I). The rates are quite high and given the high base price of land add substantially to the cost of land5. The high rates of stamp duty have led to various malpractices. These include underreporting of the value of land in the sale-deeds or non-registration with the objective of evading stamp duty altogether.

The process of registration is complete when the document to be registered is copied out in the records of the registrar's office. This can take very long. Many state governments have initiated the process of simplifying the procedure for getting the property registered.

If the house is being built by the individual for self-use and he has acquired a plot of land, he also has to pay stamp duty and registration charges for transferring the property in his own name. Further, if land is held vacant, some states levy vacant land tax and many local governments levy property tax on vacant lands.

2. 1.3 Wealth Tax on Urban Land

At any point of time, a property developer would be expected to have a land bank for his current and future projects. Urban land is subject to wealth tax but such urban land which is held as stock-in-trade is exempt from the purview of wealth tax for a period of ten years [Sections 2 (ea) (b)] of the Wealth Tax Act, 1957). The rates of wealth tax are low (Table A2.2 of Annexure I) and the condition (for exemption) is that the development is to be initiated on land within the stipulated period. There is no requirement of completing the development within any stipulated period. The builders have been clamoring for complete exemption of all lands held as stock-in-trade from wealth tax. The following arguments are put forth in favour of granting full exemption to land held as stock-in-trade for future development:

3. If the document could not be registered within four months, one can apply to the sub-registrar seeking extension and stating the reasons for delay in registration.
An extension of another 4 months is given on payment of penalty. It is not mandatory on the parties executing the sale deed to accept the circle rates notified by
the government. And they can ask the sub-registrar to refer the case to the Collector to determine the true market value. This leads to further delay.
4. The Government has made it mandatory to pay stamp duty based on circle rates determined by the Government rather than on the value stated in the sale deed.
At times these rates can be higher than the market rate.
5. According to a World Bank Study in 2004, the cost of registering land transactions as a percentage of property value in India was among the highest in the World;
the country ranked 123 out of 240 countries that were studied (as reported in Mint 14-11-06, p. 4).

i) Land is raw material for the real estate industry and therefore should not be charged to wealth tax.
ii) In most cases, land for any project is to be acquired in parcels from many different owners. The
process of acquiring land from different owners and assembling it may take a long time. The project
cannot be initiated till all the land required for the project has been acquired. Some land parcels
thus would have to be held longer than the others before development can be initiated.
iii) Under Indian conditions, various permissions are required to start the project from government
authorities, which again take time to materialise and inevitably cause time delays for the initiation
of the construction project.

The chief argument against complete exemption of wealth tax on land held as stock-in-trade is that it might lead to speculation in land. The developer may purchase agricultural land in peripheral areas when prices are low and hold it till the land ripens for higher valued urban use. Meanwhile, huge plots of land may lie unused for long periods of time, leading to unproductive (or nil productive) use of scarce land.

These laws may result in circumventing the law and evasion of payment of wealth tax by: a) delaying taking up legal ownership of land; continuing to hold land under Agreement to Sell or Power of Attorney till development; b) going for partnership with the landowner; and c) initiating development on site but delaying completion.

2.1. 4 License Fees

In many states, developers require a license to operate and a license fee is payable for the same. In Haryana, a license fee is levied. In Madhya Pradesh, in order to receive colonisers license, a bank guarantee of Rs 5 lakh is required. The license fee, however, is a 'once- for- all' cost and is not payable separately for each project.

2.1 .5 Conversion of Land to Urban/Residential Use

If the land thus acquired falls outside the urban area or is not designated for urban use, one has got to apply for change in land use classification. Along with the application fee, a conversion fee is also to be paid for getting the land converted to required use classification. The processing fee varies from state to state and the length of time required for converting from one use to another is normally quite lengthy, discretionary and not rule-based.Due to lack of clarity in policy, lands in prime areas remain unused or frozen in unproductive (or low productive) uses for long-time. In recent memory, the prime example of such policy approach is the case of the Mumbai mill lands. The government had adopted a case-by-case approach in this respect with land supply entering the market in driblets 6.

In many states, the conversion fee, especially for conversion to residential use, may not be too high. However, the delays in getting the required permission to convert raise TC and translate into higher market prices and should be factored in as cost due to the inept policy of the government.

2.1. 6 Fees for Development Permission

To obtain development permission, no-objection certificates (NOCs) and approvals are required from various departments and stipulated fees are payable for each case. These would vary from state to state and for various urban areas and sizes of projects. In Mumbai, for example, the documentation required exceed seventy in numbers. The cost of obtaining various approvals–both in terms of time and money–can indeed be exorbitant. The fees are imposed both at the state and local levels. Such fees include among others fee and charges: i) fees for approval of the layout plan: ii) fees for plan verification; iii) development supervision charges; iv) fees for obtaining building permission; v) labour welfare tax; vi) fees for environmental clearance; vii) fees for getting electric/sewerage connection; and viii) fees for getting completion certificate 7.

2.1.7 Service Taxes and VAT

The taxes and legal charges listed above are payable by the builder. Depending upon the elasticity of demand/market conditions, these charges are passed on to the consumer–in part or in full. Resultantly, such charges tend to push up property prices. Then there are the various taxes/duties on construction materials and the fees for services rendered by various professionals. Sales tax/excise duty/VAT as appropriate are levied on building materials like steel, cement, paints and varnishes, etc.Table A2.3 (Annexure I) provides illustrative rates of excise duty on selected building materials). Further, payments made to consultants like architects, structural engineers, contractors, real estate consultants and agents are subject to service tax at the rate of 12 per cent.To nullify the impact of service tax, the fees to those providing such services is increased by the tax amount, (fully or partly), thus increasing the project cost.

2.1. 8 Taxes on Income from Sale of Property

The income from sale of property by the builder to the individual is subject to income tax. During the interregnum between the completion of the project and sale of the same, housing is treated as stock-in-trade and exempted from wealth tax. There is no time limit for this exemption (Section 2 (ea) of Wealth Tax Act 1957). The government had provided complete exemption from income tax to builders of small sized housing units under Section 80 1B (10). The eligibility conditions included: i) projects initiated on or after October 1, 1998; ii) housing project to be approved before March 31, 2007 and construction to be completed within four years; iii) maximum built up area of the residential unit to be 1,000 sq. ft. if located in Delhi or Mumbai or within 25 km from the municipal limits of these cities or 1,500 sq. ft. if located in any other place; and v) built up area for shops and commercial establishments not to exceed 6 per cent of the project area or 2,000 sq. ft., whichever is lower. Conditions i) and ii) are not applicable to housing projects carried out under schemes framed by the central or state governments for reconstruction or redevelopment of existing buildings in slum areas.

6. Delays in permitting conversion of required uses create artificial scarcity in the market leading to increased prices. Even when conversion is permitted and supply increases, prices do not decline due to downward rigidity of prices–as can be seen in Mumbai case.
7. In many states/urban areas there can be many other types of fees e.g. for getting fire protection; for installing lifts, etc. Labour welfare tax is a central tax
imposed at a rate of 1 per cent of cost of development where the cost is more than Rs 10 lakhs and is payable by the developer whether it is corporate developer
or an individual. Environmental clearance charges are not payable by the individual. These would have been paid by the agency, which developed the plot and are
built into the price of land purchased by the individual.

Section 80 1A also provides 100 per cent tax exemption to any housing project being an integral part of
a highway project. The tax exemption is provided for 10 consecutive years out of 15 from the initiation of
the project. Section 80 HHBA permits 50 per cent deduction from projects of a housing project aided by
the World Bank. Eligibility conditions include: i) the assessee should be an Indian company or a resident
Indian; ii) project should have been awarded to the assessee on the basis of a global tender; and iii) 50 per
cent of profits so deducted to be put in a reserve to be utilised for the purpose of business during next 5 years
and not to be distributed as dividend.

2.2 TAXES ON INDIVIDUAL OWNER OF THE PROPERTY

2.2.1 Tax Layers

On acquiring the property the individual buyer pays stamp duty and registration charges for getting
the property registered in his own name. The developer had paid stamp duty on the value of land
and that has been incorporated as cost of the project. The individual buyer pays stamp duty on the
value of property, which includes the value of land, cost of construction and the builder's profit margin.
Therefore, this is a case of a cascading effect of taxes on prices.

After acquiring ownership of the property, other taxes becomes payable by the owner of the property.
These are: i) income tax (on income from property); ii) wealth tax; and iii) property tax. One
owner-occupied property is exempt from wealth tax and income tax. Residential properties that have
been let-out for a period of more than 300 days in a year are also exempt from the purview of wealth
tax. The policies are aimed at providing incentives for the construction of houses by the actual users
and where necessary occupation of the houses built. Property tax is payable on all properties. Other
local taxes imposed on these properties may include drainage tax, water tax, conservancy tax, fire tax, lighting tax, betterment tax and additional stamp duty.8

2.2.2 Property Tax

Property Tax is payable by all property owners barring properties specifically exempted from payment
of duties. There are two major systems of property tax prevalent in the country. One is based on rental value
of the property and, second one based on capital value of the property. In case of former, tax base is the gross
annual rental value at which the property is reasonably expected to let from year to year. The reasonable rent
in many cases was interpreted as standard rent as defined under the rent control laws 9. Many municipalities
delinked the ratable value as base of property tax from controlled rent and made the occupant liable to pay
the tax. However, the ultimate responsibility of paying property tax continues to be that of the owner. The
rates are in most cases lower for owner-occupied properties than for rented properties.

In the second system based on capital value, tax base is the estimated capital value of land and value of
the structure erected on this land. In both systems, the ratable value or capital values were based on the cost
of construction and value of land at the time of commencement of construction. In a scenario of continuing
rising land prices, this would mean higher property taxes for newer constructions leading to horizontal (or
even vertical) inequities. It also creates anomalies in the tax structure. Similarly, properties in the same location
would be levied highly divergent taxes based on the year of construction The above anomaly has been
sought to be rectified by a new system, namely unit area method of levying property tax (Delhi). Under this
system, the city is divided into different zones; unit value for covered space assigned to each zone; and
weights are given to parameters like tenure (rented or owner occupied) of the property; age of the property;
type of structure and use (residential or commercial). Rented properties are given a higher weight compared
to owner occupied properties, so are newer properties. The tax burden on different types of properties would
thus be a function of weights given to different characteristics of the property 10.Many ULBs are shifting to
the unit area system of property tax–being more rational of the system. Property tax rates in selected ULBs
under the two systems are given in Table A2.4.

2.2.3 Income Tax and Tax Expenditure on Residential Properties

As noted above, one owner–occupied property is exempt from payment of income tax. If, however due
to reasons of business or profession, the owner has to reside in some other place in a building not belonging to him no tax is payable on the property.Tax is payable on all rented properties. If a person owns more than
one property, tax is payable on all but one–even if other properties are not rented.Tax base is the annual
value of the property. Annual value (AV) is defined as the sum for which the property might reasonably be
expected to let from year to year or actual rent whichever is higher. In case the rental property is vacant for
part or whole of the year,AV will be the actual rent received or receivable. (Section 23 (1) of the Income Tax
Act 1961).Taxes payable to the local body are deductible from rental income.Over and above the deduction
provided on account of local taxes under Section 23 of the Act, Section 24 of the Act also permits the following
deductions: i) 30 per cent of annual value ; and ii) amount of interest on housing loan, if any. Further,
in case the net rented income after deduction is negative, this can be offset against income from other heads
or carried forward and offset against the rental income for next eight years (Section 71, 71A and 71B of the
Act).

8. Urban local bodies (ULBs) are permitted by law to charge these taxes. These taxes are optional. Many ULBs do not even levy property tax. Most ULBs exempt a
number of specified properties from payment of property tax.
9. The method of valuation was circumscribed by the judgement of the Supreme Court in the cases of Dewan Daulat Raj Kapoor (1980) and Dr. Balbir Singh holding
that reasonable rent can not be more than the standard rent.
10. Thus, in Delhi, the weights for properties constructed at different points of time range from 0,5 to 2 depending upon whether the construction was completed
prior to 1960 or after 2000. The weight for tenanted properties is kept at two and for owner occupied at one. Thus, the tax on older properties still will have lower
tax liability than the new construction on rented properties will be double that of owner occupied properties - other factors remaining the same.

Rental housing is treated as an investment good and expenses related to the same are thus permitted as
deduction from income originating from rental housing Limited deductions are also available to owners of
owner occupied housing. Deductions on account of payment of interest on housing loans are permitted up
to a ceiling of Rs 30,000. The permissible deduction is Rs 1.5 lakh for property constructed or purchased
with capital borrowed on or after April 1, 1999 and the construction of such property completed within 3
years of borrowing. There is no ceiling on deduction of interest payable (on housing loans) in case of rented
properties. Further, the deduction of Rs 30,000 in case of owner-occupied property and the unlimited
deduction in case of rented properties are available for interest on housing loans used for acquisition, construction,
repair, renewal or reconstruction. The deduction of Rs 1.5 lakh is available only for housing loans
for construction or acquisition and not for repair, renewal or reconstruction.

The enhanced deduction of Rs 1.5 lakh was introduced in 2001 with the objective of encouraging new
construction and thus ameliorating housing shortage. Borrowing for housing would normally require mortgaging
the property to the lender. Stamp duty is payable on mortgage deed. The stamp duty will be payable
on the amount of loan. This adds to other TC incurred by the borrower including application fees, administrative
and processing charges, insurance charges and legal charges.

Relief under Section 24 of the Income Tax Act is limited to repayment of interest on housing loans.
Section 80C of the Act permits deduction of up to Rs 1 lakh on account of repayment of principal, payment
of stamp duty, registration fee and other expenses related to transfer of house property to the assessee.No
deduction is available for expenditure incurred on addition, alteration, renovation or repair or for initial
deposit for housing.

This deduction is available both to owner occupants and owners of rented properties. The deduction
would be available only if the payment is to be made to the institutions specified under Section 80C
(CXVII) (a) to (c).11 Section 24 does not put across eligibility conditions for the type of lenders The only
condition is that the assessee is to furnish a certificate from the person to whom any interest is payable. Benefits
under Section 24 and 80C are available for any number of houses. These provide significant relief to
income tax payers availing of housing loans. The relief is available for the entire term of finance.

2.2.4 Capital Gains Tax

In the event of (re) sale of property by the individual a capital gains tax is payable by the seller. The capital
gains is calculated by deducting cost of acquisition and improvement of the property and all expenditure
incurred in transfer of the asset from the sale amount. In case of long-term capital gains, the cost of acquisition
and improvement will be inflation–indexed.12 The net capital gains are taxable at a flat rate of 20 per
cent–irrespective of the taxpayer's tax slab.Exemption from capital gains is granted if the residential property
is a long term capital asset (i.e. has been held for more than three years and i) the capital gains are invested
in purchase or construction of a residential house within one year before or 2 years after the transfer/sale if
the house is being purchased or within 3 years of transfer in case of construction; (Section 54 of the Income
Tax Act), or ii) the capital gains are invested in specified assets within six months after the date of transfer
(Section 54 EC of the Income Tax Act). The specified assets have been changing over time. For the period
April 1, 2006 to March 31, 2007 the assets included: bonds issued by the National Highway Authority of
India and Rural Electrification Corporation Ltd. The Finance Act 2007 also added a condition that the
benefit of exemption in case of investment in specified assets will be up to Rs 50 lakhs in one financial year.
The specified assets carry a much lower interest rate (at present being 5.5 per cent) and this interest income
is taxable.

Another provision in the Income Tax Act favoring investment in residential property relates to exemption
from capital gains, accrued on sale of long term capital asset other than residential property, if the net
sale consideration is invested in a residential house (Section 54F). The condition of purchasing or constructing
the house within the stipulated period is the same as in Section 54. The additional condition is that on
the date of transfer of the original asset the assessee should not hold more than one residential house or construct
another house within 3 years or purchase another house within one year of transfer of the original
asset.Till 2000 the condition was that the assessee should not own any house on the date of transfer or purchase
within one year or construct within 3 years any other house from the date of transfer. The objective of this condition (presumably) was to 'encourage' first time buyers to invest in housing. In 2000 (wef. April
1,.2001) the benefit was extended to enable increased investment in housing (in response to representations
made by the real estate sector). The exemption under these sections will be proportional to investment and
tax will be payable on the residual amount. Further, in all cases there is a lock-in period of 3 years before the
newly acquired asset can be transferred.

11. These include cooperative society, development authority, Housing Board, Central or State Government any bank, Life Insurance Corporation or National Housing
Bank or any public Housing Finance Company formed and registered in India or an employer so long as the employer is a public sector or public company, or
university or a para-statal institution.
12. If a residential property is sold after three years of holding, the capital gains arising from it will be deemed as long term capital gain.

2.2.5 Taxation of Rental Housing

Apart from Section 24, which provided deduction on account of expenses incurred and local taxes to
owners of rental housing and wealth tax, which exempted rental housing, other benefits are available to both
tenants and employers providing staff housing. Under Section 80GG of the Income Tax Act, any expenditure
incurred on payment of rent in excess of 10 per cent of assessee's income is deductible from his income
(provided the assessee, his spouse or minor child, does not own the house). Maximum deduction permissible
is 25 per cent of income or Rs 2,000, whichever is lower. Employee housing is given the benefit of
exemption from wealth tax provided the employee's income does not exceed Rs 5 lakh per annum, [Section
2 (ea) (i) of the Wealth Tax Act.

2.2.6 Taxation of Housing Finance Companies

Profits of housing finance companies are subject to income tax.13 Forty per cent of these profits derived
from providing long term finance for housing are exempt from taxation if these are put in a special reserve.
In case the amount in the reserve account exceeds twice the amount of paid up capital and reserves, the
excess becomes taxable. In 2007 (wef. April 1, 2008), the exemption was reduced from 40 to 20 per cent of
profits.

The various tax concessions did reduce the tax burden on homebuyers and developers The benefit, however,
was confined to taxpayers On the other hand the legislative policies, administrative hassles and legal
charges impacted all stakeholders in the housing sector.

2.3 LEGISLATIVE POLICIES RELATING TO HOUSING

There are two important enactments which have had the strongest impact on the housing sector; the
Urban Land Ceiling and Regulation Act (ULCRA) and the Rent Control Act (RCA). These legislative
policies were enacted with the objective of reducing the cost/price of housing in the market.

13. Long term finance means when a loan is advanced for a period of five–year or more.

2.3.1 Urban Land Ceiling and Regulation Act (ULCRA)

ULCRA was enacted in 1976 as part of a pro-socialist stance of the government to put a ceiling on the
total urban land one could hold and make surplus land available to the government. It was felt that concentration
of land in a few hands was pushing up the price of land and this measure would bring about equitable
distribution of land and curb speculation, thereby keeping land prices at a moderate level.The Act was
applicable in urban agglomerations. The ceiling (limit) ranged from 500 sq. metres to 2,000 sq. metres. for
different categories of urban agglomerations.14 Lands held above this limit were to be acquired at predetermined
prices by the government and allotted to any person for any purpose relating to or in connection with
any industry or for providing residential accommodation of such type as may be approved by the state government
to the employees of any industry [Section 23 (i) of ULCRA, 1976]. The predetermined prices were
significantly lower than the market price. The price was not to exceed Rs 5 per sq. metre C & D categories
of urban agglomerations and Rs 10 in categories A & B. In case the vacant land was generating some
income, the price was to be 8.33 per cent of the net average annual income for the past five years,Other
restrictive provisions of the act related to prohibitions on transfer (including sale, mortgage, gift, lease) of
urban land with a building without the permission of the Competent Authority (CA). This added another
step in land/building TC as a NOC (No Objection Certificate) had to be obtained from the CA who may
or may not grant such permission. In case the permission was sought for sale of property and it was granted,
the law gave the CA the first option to purchase the property at prices agreed between the CA and the applicant
or at prices calculated as per the provisions of the Land Acquisition Act 1894 [Section 27 (1) and (5) of
ULCRA].

Exemptions from the Act were granted under Sections 19, 20, 21 and 22. Exemption under Section 21
was directed towards providing housing to the weaker sections of population. ULCRA was repealed in
1999 by the central government. At present, all states except Andhra Pradesh,West Bengal, Jharkhand and
Assam have repealed this Act.

2.3.2 Rent Control Act

Unlike ULCRA, which aimed at providing 'cheaper' land not only for housing but also for industry, the
Rent Control Act (RCA) was enacted with the solitary objective of protecting tenants against exploitative
rents. The major provisions of the RCA included control on rents and rent revisions; restrictions on eviction;
and enjoinment on landlord to maintain the property in habitable conditions. Under the Act, the tenant
has statutory protection and can be evicted only on grounds specified in the RCA. The grounds for eviction
in most states include non-payment of rent, misuse/disuse of property, availability of alternative accommodation to the tenant and requirement of the premises by the landlord for self-use or repair. Most state
Acts exempt a number of premises from the purview of the Act.

14. The urban agglomeration were divided into four categories–A,B,C and D–depending upon the size of population, Delhi, Mumbai, Chennai and Calcutta were
under Category A.

2.3.3 Transfer of Property Act (TPA)

Availability of housing finance improves the affordability to pay for housing and expands the market.
This is an important factor helping the development of the housing sector. Healthy growth of housing
finance depends upon a legal framework that provides significant comfort level to the lender. Housing loans
are long-term loans and the security offered is mortgage of the house. In case of default, the lender forecloses
and is to take possession of the house. In case the default rate is high and foreclosure is difficult, the housing
finance system can collapse. The existing law under the TPA governing foreclosure is cumbersome and
highly time consuming. In a court of law, it can take years to recover outstanding mortgage dues in case of
default.

2.3.4 Stamp Duties on Mortgages

As noted earlier in the paper, the mortgages have to be registered. The high rates of stamp duty have
resulted in preference for equitable mortgage (which do not have to be registered)15. Non-registration of
mortgages means that there is no public record/notice of the charge, which has been created on the property
by borrowing against it. This makes transactions in land much more risky by reducing security in title. Thus,
also makes it a riskier proportion for HFCs. Since the unregistered document cannot be presented in court
as evidence, in case of default the onus of proving that the property has been mortgaged to the lender lies
with the lender.

2.4 IMPACT OF TAXES, LEGAL CHARGES AND LEGISLATIVE POLICIES ON HOUSING SECTOR

The taxes, legal charges and legislative policies mentioned above have divergent objectives. Some were
devised to specifically address contemporary housing issues, while others had non-housing objectives and
their impact on housing was unintended.Thus, the major objective of stamp duties, property tax and income
tax was one of revenue enhancement from the many documentation/registration fees that were levied to cover the administrative costs of operation. Tax concessions given to housing, RCA and ULCRA were
introduced to make housing more affordable but not necessarily to increase the supply of housing in all
cases. It is important to see the impact of these government interventions on the housing sector in the background
of current housing situation in India.

15. An equitable mortgage can be created by deposit of title deeds with the lender.

The housing situation in India continues to remain a serious concern with an estimated total housing
shortage of 31.3 million units in 2001. The break up of this shortage is 7.1 million units in urban and 24.0
million units in rural areas (HUDCO). In rural areas, only 41 per cent of housing was pucca; this percentage
was 71 in urban areas. Further a significant percentage of households lived in extremely congested conditions,
41.6 per cent households lived in one room or had no exclusive room. A sizeable number of such
households were large sized households. Please refer Tables A2.5, A2.6 and A2.7 in Annexure I for dimensions
of this aspect. The major cause behind such an adverse situation is the high price of housing compared
to the affordability of the population. The housing price to income ratio in Indian cities is much higher than
in many other countries (Table A2.8 in Annexure I). In the rural areas it is actually more dismal. The Technical
Group on Estimation of Housing Shortage (for urban areas) for the 11th Plan concluded that as of
2007, 72.8 per cent of housing shortage would be that of the economically weaker sections (EWS) and
another 25.5 per cent of the lower income groups (LIG)16 (Technical Committee Report, Government of
India).

The situation has not changed over time. The working groups on housing set up for the 9th and 10th
Plan periods had come up with similar conclusions. Recognising the gravity of the situation, the Centre had
formulated the National Housing and Habitat Policy in 1998, with the objective of providing 'Housing for
All' and focussing on housing needs of citizens in general and that of the poor and the deprived in particular
(Government of India: 1998 and 2007).17

A major component of the housing strategy of the government has been to increase investment in housing.
In the context of the acute housing situation and the declared aim of the National Housing and Habitat
Policy (NHHP), it would be pertinent to see the impact of various government interventions (mentioned
above) on the housing sector. In the following paragraphs we discuss the impact of each of the government
policies mentioned above on the housing sector. The impact is to be seen on the basis of the following
parameters: i) affordability of housing for different income groups; ii) investment and supply of housing; iii)
price of housing; and iv) efficiency of property market.

16. EWS is defined as a household with household expenditure <Rs 2530 and LIG with a household expenditure between Rs 2530 and 4930. (Technical Report–
Government of India).
17. A new National Urban Policy has been formulated and approved by the Cabinet on 4th Dec.2007. The objectives and concerns for housing of the lower income
group continue to be the same.

2.4.1 Impact of Legal Charges and Documentation Fees

The discourse on the tax burden on housing is generally confined to high stamp duties, income tax and
property tax. As noted earlier, there are a large number of other taxes/duties/fees payable to the state at the
construction stage. There are two aspects of the cost namely: i) monetary cost and; ii) cost in terms of time
devoted in obtaining various permissions and clearances. The number of permissions and documentation
required can be quite large. Further, permissions have to be taken from different departments and that too
sequentially. This delays the process of housing construction and occupation further. Introduction of single
- window system has not helped the matters much. The system is either not implemented or has at times
resulted in more delays. The applicant has not only to pursue the file in each department but also ensure that
the file has moved from the single window to the department, cleared at the department level and moved
back to the single window from where it is to be delivered to the applicant. The actual fees imposed by the
government are not necessarily high but the time taken to obtain requisite permissions is very long, procedures
cumbersome and 'extra' payments to facilitate the movement of files and getting the transaction
through is significant vis a vis the statutory fees. The delays accentuate the sluggishness of the market by
increasing the gap between change in demand and the market response to it.18

Acquiring the plethora of government permissions has become a specialised skill by itself, and has
spawned a class of middlemen adept at procuring these. This raises costs still further and eventually affects
the market.

2.4.2 Impact of Stamp Duties

High stamp duties increase the TC of properties leading to major fallouts on the housing market:
1) The higher cost of 19 procuring housing might lead to the exclusion of marginal groups from the
housing market or force them to settle for inferior product (inappropriate location, smaller sized
housing or housing with deficient infrastructure or tenure). Since stamp duty is payable every time
a transaction is made, it acts as an important deterrent to mobility of households. This not only
results in sub-optimal location decisions (and at times even decisions relating to change in jobs) at
the level of households, but also accentuates inefficiency in the housing market. Market does not
readjust itself to changing requirements remaining in continuous disequilibrium.

2) High stamp duties propel the buyers to either under-record the value of transaction or not record it
altogether. As a result, the government loses revenue. However, a much more serious implication for the land/housing market is the incomplete knowledge about the state of the market.The num
ber of transactions in a market is an indicator of the activity level in the market and prices estab
lished as a result of this activity act as a guide to the policy makers about appropriate policy
responses.20
3) Many 'sales' take place on 'Power of Attorney' (POA) basis.POA does not confer ownership right
on the person holding POA. This leads to deficiency in land records.With property changing
hands a number of times on a POA basis,21 it becomes increasingly difficult, if not impossible to
identify the real owner.22 This further accentuates imperfections in the land market. Lack of trans
parency in ownership right deters many from entering the market.

2.4.3 Impact of Property Tax

Impact of property tax Most local authorities still base their property tax on ratable value. The ratable
value is calculated as a percentage of the cost of construction and the price of land at the commencement of
construction. In a scenario of continuously rising land prices, newly constructed properties would pay a
much higher property tax than the older properties - even when the market value of two might be the same.
Even in the unit area system of property taxation, older properties pay lower tax than the new properties age
being a variable in determining the tax. This would not only distort the market (with higher demand for
older properties), but would also have a negative effect on investment in new housing. The higher property
tax may get capitalised into the value of new properties and 'depress' the price to some extent.

Higher rate of property tax on rental properties is justified on the basis that these earn rental income
while owner-occupiers do not earn any income from their properties. The impact of this tax however is to
reduce rate of return from rental housing; create a black market in rental housing and/or under - report the
rent charged.23

Many ULBs have delinked their property tax from standard rent as fixed under the rent control act.
Since the ultimate responsibility to pay property tax continues to be that of the owner, low rent under the
rent control regime combined with high property tax would mean negative or extremely low rate of return.
Even if one discounts the impact of the Rent Control Act, the rate of return from rented housing, especially
for new construction, is very low due to low rent value ratios. Income tax and property tax reduce it even further. Property tax as a percentage of market value still comes out to be quite 'reasonable'. The main culprit is
the high property prices.

18. The housing market is a very imperfect market due to its inherent characteristics. Due to this imperfection, its response to changing requirements/demand is
slow and lagged. As demand increases, supply cannot increase immediately resulting in increased prices. Even when supply increases after a lag, prices do not
fall. Greater the time lag between increase in demand and supply response, higher will be the increase in prices.
19. The latest notification by the Government changing the base of stamp duty to value as registered in the sales deed or circle rate whichever is higher, has
increased the burden still more in cases where the circle rates are higher than the market price.
20.Many households may like to shift to different locations or different sized housing over their life cycle but continue to be rooted in the same house forever. A
notable example of such a phenomenon is old retired persons continuing to stay on in prime locations in the urban areas, which if vacated could release some
housing for the working population and would have positive impact on prices.
21. POA does not have to be registered but has to be stamped, executed and authenticated before the sub-registrar.
22. In Delhi, a very large number of transactions are carried out on POA basis. This is done not only to save on stamp duty but in case of Delhi Development Authority
(DDA) housing, to avoid payment of part of profit made on sale to DDA, as is required under DDA regulations. This is for houses/flats purchased from DDA on
leasehold basis.
23.Many owners of rented properties declare their properties as self-occupied describing the occupants as relatives.

Property tax is the major source of revenue for ULBs. Low buoyancy of property tax, despite a buoyant
property market, has been a major cause of concern for the policy makers and this has been reflected in the
literature on property tax. The focus in the literature on property tax has thus been on the basis of property
tax in line with increasing market value of the property. The second concern about the burden on the property
owner (of increasing the tax base) has not aroused as much interest. For the owner occupants of older
properties, the increase in market value is notional and a higher property tax based on market value could
force him to either sell out or shift to an inferior location or rent part of the premises to 'finance' increased
property tax. Thus, higher property taxes may lead to more efficient use of space or more 'optimal' location
decision. The decision to sell (and buy another house) would be tempered by high TC (search costs, brokerage
fees, stamp duties, etc.) and the decision to rent out by higher property tax payable on rented part and
the fear of losing the property altogether under the Rent Control Act.

According to a study carried out for Pune and Bangalore, the shifting of the tax base from ratable value
to zone-based capital value has increased the tax payable by percentages ranging from 39 to 77. The study
has also estimated the increase in property tax if the base is shifted to market values. In the case of Pune, the
tax on a sample property would increase by as much as 70 per cent: the range being 27.8 to 214 per cent.The
focus of the study is on increasing the revenue from property tax (as is the case in most studies on property
tax). The impact of such increases on housing sector (investment in housing etc.) is not discussed. This is a
neglected area in most researches on property tax.

2.4.4 Impact of Legislative Policies

Legislative policies like rent control and ULCRA have had a significantly negative impact on housing
and led to increased prices. The impact has been just the opposite from the intended objectives. ULCRA
was enacted to curb speculation in land and since government was to acquire surplus land and allot it for
specified purposes, an implicit assumption was that it would have a salutary impact on land prices.However,
very little land was acquired under ULCRA, and even less was allotted for housing.The Act resulted in taking
a vast portion of land out of the market and created an artificial scarcity in the land market. Land prices
spiraled after the Act was brought into force. Not only was the Act badly designed, it was poorly implemented
as well. The Act was repealed after being in operation for more than 23 years. The damage done by
the Act, however, cannot be undone. Its repeal is unlikely to have much impact on downwardly rigid land
prices.

As per the provisions of the ULCRA, the scales were heavily tilted against the landowners who did
their best to save their valuable lands by taking advantages of all loopholes provided in the act. This meant,
in most cases, recourse to the courts, leading to huge tracts of land getting entangled in litigation. The cost
of litigation was not only on the litigants but also on the government in terms of cost of judicial services.
Considered at one time as a zero-cost solution, ULCRA proved to be counterproductive and very expensive
for the housing sector.

The Rent Control Acts were promulgated to protect the tenants against exploitative rents. It has resulted
in vanishing investment on rented housing, reduced supply of rental housing, increased rents and acrimonious
relations between landlords and tenant (See Wadhva: 200024). This can be seen in decline in the
percentage of households living in rental housing (Table A2.9 in Annexure I).

The second generation of rent control acts has attempted to liberalise the Act somewhat by increasing
the ambit of exemptions, permitting revision in rents and passing maintenance responsibilities on to the
tenants. Most of the changes, however, leave the existing tenancies untouched. Many of the existing tenancies
are in the prime areas of cities where land is extremely valuable and ripe for high value uses. These premises
are virtually out of the market. The remaining units in these areas command huge rents. The impact on
the rental market as a whole in terms of high/unrealistic rents is understandable.

The negative impact on RCA has been not only on the rental housing market but also on the housing
market.

The impact of the RCAs on the rental housing market in particular and on housing market in general
would have been much worse if these were stringently imposed.RCAs in most states have been only partially
effective. Both the Acts might have been motivated by pious social objectives, but failed because they
were bad economics.

A very recent development in the housing sector in Delhi relates to the decision of the Supreme Court
to allow the landlords to get their commercial premises vacated for their own/dependents' use. This was
already applicable to residential properties in Delhi.

2.4.5 Impact of Tax Concession on the Housing Sector

Tax concessions under Sections 24 and 80C reduce the effective rate of interest and monthly installment payable. The main impact of these has been to improve the affordability for housing of tax-paying
individuals who borrow funds for purchase of construction of their house. Benefit is however limited to a
miniscule proportion of population.25 Further, since income tax is progressive, benefit would be higher for
higher income groups.

24. Wadhva, K. (2000) 'Housing and Tenancy Legislation' in Misra, G.K. and P.S.N. Rao eds. Housing Legislation in India', Kanishka Publishers, Delhi. Change with
new

The most direct impact of these tax incentives has been an increased off take of housing finance.Total
loan amount by housing finance companies and commercial bank increased significantly over the period
2001—2006. The greater demand for housing finance was also concentrated at the higher end as evidenced
by increased size of average loan amount.

The impact of these incentives on investment/production of housing seems to be much lower. Gross
domestic capital formation in residential construction showed a much lower rate of growth over the period
2001—06 compared to that of housing finance. The same conclusion is reached by a comparison rate of
growth in number of pucca housing units in the decade 1991-2001 despite the increased tax incentives.
Whatever increase in investment or production had taken place might be at the higher end. The housing
conditions of the upper income groups improved while those of the poorest deteriorated. The percentage of
households living in 'no-exclusive rooms' increased from 0.04 per cent in 1991 to 2.3 per cent in 2001, while
the percentage of households living in 2-3 rooms increased from 44 to 46 per cent.

Section 801B was directed towards incentivising the production of small-sized housing units which
would have improved housing conditions for the poor if the benefit had been passed on to consumers. The
concession was misused in most cases with developers providing lower (as permissible under the provision)
covered space but providing bigger open space, which could be covered later on, or, building 2-3-4 smallersized
units that could be joined at a later period. The developers were never interested in building smallsized
houses since profit margins in these are lower. The pre-budget representations to the government by
the builders' associations lobbied in favour of increasing the permissible size.

It is quite possible that part of the tax incentives given to borrowers and developers would have been
capitalised and translated into higher property prices. Property prices have shown continuous and sharp
increases over the period 2001–07.26

Considering rental housing as an investment good, the concessions were much higher it. This, however, does not seem to have encouraged investment in the area as evident from the continuous decline in the percentage of households living in rental housing -which would be reflection of the decline in both demand
and supply of rental housing. As noted earlier, the rate of return on rental housing is very low in controlled
or even uncontrolled premises. The major return from investment in housing originates from capital gains
and RCA is a major obstruction in realising capital gains from rented property. The tenant can be evicted
only on grounds specified in the RCA. Thus, even when investment in properties increases, it is either for
self-use of is kept vacant till 'ripe' for sale.

25.Income tax payers comprise a mere 2.79 per cent of total population. Those who go for purchase for housing among these, at any point of time would be smaller
than this number and those who borrow among these will be even smaller.
26. Decidedly major part of increase in property prices is part of the growth story of Indian economy but contribution of tax incentives is also quite significant.

The contribution of concessional housing loans, low holding cost (quite a few ULCRA do not even levy
property or house tax) and exemption from capital gains tax has inflated investment (read speculative)
demand for residential properties. A large number of loans were for a short period, which indicates that
demand was for a shorter duration. The term of the loan had decreased over time.Tables A2.10–A2.16 provide
more insights into the housing finance scenario.

Another impact of the concessions has been to distort allocation of funds in favor of housing at the cost
of other sectors. The share of commercial bank credit to real estate as a proportion of total credit has
increased. This would not be a cause of much concern if the increased credit outflow were directed towards
amelioration of the housing problem. A significant part of credit has either boosted investment demand or
motivated the upper middle or upper income groups to go for more expensive houses or second homes.

There can be no two opinions that the single most important objective of a housing policy should be to
increase production of affordable housing for all. Income tax concessions provided by the government have
contributed to this. Their reach and impact–especially on production of housing – has been quite limited.
The government has a number of subsidised housing programmes for the rural and urban poor, but their
impact has been limited. It is an indisputable fact that the government does not have enough resources to
provide adequate housing to all sections of the population. Instead of or in addition to these attempts to
booster demand for housing, a strategy must be devised to reduce the cost of housing and make it more
affordable the for masses, while simultaneously accelerating investment in housing. The components of
such a strategy would include: (i) reduced taxation and legal charges; (ii) reduction in time taken for giving
various permissions at different stages of development of land, and, (iii) disincentivising speculative investment.
Of all the taxation and legal charges, stamp duty has multiple negative impacts on the property market
and its reduction would also fulfill several objectives. These are: reducing the cost of transaction, improving
transparency in land deals and increasing the efficiency of the property market. Apart from reducing the
rate of stamp duty, it is suggested that it may be levied only on the real value addition of the property and
discount may be provided for stamp duty already paid in earlier transactions. In order to lessen the burden
on low cost housing, a graduated system of stamp duty may be adopted with complete exemption to residential properties below a certain value. Some states like Maharashtra have such a system with lower rates
of duty for lower valued properties and higher rates for higher value properties.

It needs to be seen that the total tax burden on housing (including tax and fees levied at the production
stage) is reasonable.27 The test of a 'reasonable' tax burden is that after tax rate of return from housing should
be in line with the rate of return from other (financial) investments with similar risk profile.28 Specifically,
the higher tax burden on rental housing works as a disincentive for investment not only in rental housing,
but in housing in general. In India, housing stock shifts back and forth from owner-occupied to rental over
the lifecycle of household and a higher tax burden on rental housing discourages investment in housing per
se.

The return from investment in housing is affected not only by taxes and fees but also by restrictive legislations
like RCAs. Many states have already amended these Acts and many others are in the process of doing
so in response to various incentive schemes from the central government. It is however a moot point whether
the amendments carried out by the states are sufficient to boost investment in housing or fall far short of the
requirement.

The major component affecting the rate of return and investment is the high cost of housing, which is
accentuated (apart from taxation and legal fees) by the delays in obtaining various permissions and the
'speed' money payable to expedite the process. Reduction in delays not only impacts this cost component,
but also improves the efficiency of the market.There are three important areas which need to be targeted for
this purpose namely title assurance or insurance by the government; clear cut policies for conversion of land
from one use to another (especially from agricultural use to residential use) and a fast process for giving
development permissions (including pre and post-development permissions). Reforms in the process of
giving permissions would obviate the need for tax exemptions of wealth tax to lands held as stock-in-trade
for 10 years depending upon the speed at which permissions can be obtained, this exemption could be limited
to 3-5 years Permitting holding of land tax free for such long periods could result in speculative holding
of land and leads to increase in prices of land. Holding of land (as land banks) means that a large chunk of
land is outside the market, leading to increase in prices. Some argument could hold over here.

There is also need to review various (income) tax concessions provided to housing. It is likely that
most tax concessions – partly or fully – get capitalised in the price of housing. Thus, instead of making
housing more affordable, tax concessions increase the cost for non-tax payers and do not much improve affordability of the taxpayers With the objective of encouraging investment in lower cost housing, the
regressivity of the tax concessions needs to be reduced. This could be done in a variety of ways, namely
(i) by restricting it to a basic rate of 10-12 per cent. Thus only 10-12% of interest payment could be
deducted from tax; (ii) limited to incomes below a certain level; (iii) capping the total amount of subsidy
as in case of owner-occupied housing, and (iv) providing tax exemption at a flat rate rather at the marginal
rate of tax payer.

27. Tax concessions under Sections 24 and 88 do lessen the tax burden. However, these are not only limited to tax payers but also last only the term of the housing
loan.
28.Since housing is a state subject, the tax rates vary from state to state and estimate of tax burden has to be done at state level.

Tax concessions may have led to some reallocation of funds across uses.29 One measure to limit the
incentives is to, limit tax concessions under Section 24 and 88 to first time purchasers and for one house
only.30 In such a case, given the high price of housing, government could consider increasing the permissible
relief under Sections 24 & 88. Similarly capital gains tax exemption given only after holding the property
for three years encourages speculative investment. The exemption may be provided only once in lifetime or
and for investment in new housing so that production of housing in encouraged. Exemption may also be
conditional upon investment of total resold amount rather than capital gains alone. Further, capital gains be
indexed only after the house is held for more than five years.

2.5 SUMMARISING

Taxes, legal charges and legislative policies have been introduced at various points of time with varying
objectives, at times working at cross purposes, nullifying to a large extent the net impact on the housing
sector. The prime example of such a situation is the combination of policies of the RCA (which
freezes rents at low levels); property tax (with higher rates of property tax on rental properties) and fiscal
policies which incentivise investment in rental housing through tax deductions. The net effect of all
these policies is low or at times negligible investment in rental housing. On one hand, the government
loses revenue on account of tax concessions, while other policies neglect the intended outcomes. Similarly,
legislations like ULCRA have led to phenomenal increases in land prices, but excluding large sections
of the population from formal housing markets or forcing them to opt for inferior housing. The
huge increases in the price of land have aggravated the housing problem. In order to offset the impact of
these 'negative' policies, the government has got to resort to various other expensive solutions like subsidies
to sections of the population. The policies having a negative impact need to be reviewed/ reformulated
and a comprehensive policy towards housing should be formulated.

29. Investment in housing as a result of tax concessions would be very desirable outcome if it led to increased supply, reduced prices of housing. Such an outcome
does not seem to have transpired in the Indian case.
30.Concession for investment in rental housing could be justified for more than one house. Such concession however has not had much impact on supply (or
rents of) of rental housing. Investment in rental housing would benefit much more by policies to reduce cost of housing, reform in restrictive legislation and fair
rates of taxation.

The taxation and legal issues encountered by the key operators in housing construction, their implications
and recommendations based on the analysis for the present study have been summarised in Tables 2.1
and 2.2.

Table 2.1: Summary of Steps in the Acquisition of Housing Property, Legal and Taxation Issues and Implications to Housing Sector Development

Table 2.2: Summary of the Impact of Select Tax and Legislative Measures and Recommendations to Accelerate Housing Sector Development

3. SURVEY METHODOLOGY

As indicated earlier, a major objective of the present study is to provide an estimate of the structure of
housing property prices in the country. The conceptual framework for the present study is largely based on
the NHB study on transaction costs. In order to capture the variations across the country, it was decided to
carry out the exercise in 45 cities (Table 3.1) spread over 16 major states (excluding Delhi) of the country.

Table 3.1: List of Cities for Estimating the Price Structure of Housing Properties

As the objective of the study was to obtain the main components of price, the key informants were property dealers, developers and housing finance agencies in each area. Identifying the 'buyers of property' was not feasible within the parameters of the study. So, the intermediaries were selected for the survey.

There are no lists of property dealers and developers available for each city. Therefore, it was decided to select a small number of property dealers. Five housing finance agencies were also contacted in each city. We expected to get information on just five transactions carried out in 2007 from each of these intermediaries. Among these transactions, three were to be on residential and one each for commercial and institutional properties. In addition, two district centres in each state would be used to collect information on transactions in the rural areas of the respective districts.

The following sample size was specified for each city:

• Property agents: 30
• Building contractors: 10
• Housing finance agencies: 5
  

The survey was also designed to provide information on transactions covering different price segments of the property market.

To begin with, it was planned to collect information on transactions from approximately 100 urban residential properties, 30 urban commercial properties, 10 rural residential properties, and 10 rural commercial properies from each distrioct/city. However, despite all our efforts, as also because of the limited resources, the final usable data, except in some states (notably in Patna), was available for only a smaller number of transactions as shown in Table 3.2.

Table3.2: Number of Transactions for Which Information was Obtained During the Field Survey

Note: Cities are arranged by state. In Himachal Pradesh only one city (Shimla) has been selected. For Uttarakhand it is only two (Dehradun and Roorkee), while for the others, it is three each.

In all, information was collected on 3,281 urban and 249 rural property transactions. Only urban residential
housing property transactions were fairly well represented in the sample. In other cases, the number
of transactions is relatively small at both city and state levels. One reason for the small number of cases on
which data could be obtained was unavailability of the requisite number from each respondent. The respondents
did not retain the data systematically, but relied mostly on their memory.

As pointed out earlier, the data were obtained from three types of respondents: Property dealers, property
developers or builders and housing finance agencies. The number of transactions by type of respondents
is provided in Table A3.1 in Annex II.

The majority of the responses are from property dealers. In the case of housing finance companies however,
there was a lack of systematic response. The responses were first averaged at the city or state level
depending on their relevance and then averaged further to provides overall estimates of the various indicators.
The findings based on the survey are provided in the following section.

4. PRICE STRUCTURE OF HOUSING PROPERTIES: FINDINGS FROM THE SURVEY

A sample survey of property dealers, developers and housing finance agencies was conducted on various
components of TC in housing property transactions. The details of the survey have been given in Chapter 3.
The focus of this survey was to collect information on the price structure of different types of housing properties.
The study also used the survey to map the process of various activities in housing property acquisition.
This was done by checking the standard housing acquisition process with the respondents in various
cities. The survey findings provide an assessment of the importance of different components of housing
costs.

The 'cost of property' to the buyer has been taken not simply as the 'value' of the property at which the
transaction takes place between the buyer and the seller. It includes the costs involved in the transaction
such as the statutory fees and charges, the fees for the professional services in the transaction and any other
expense. As the survey was based on the intermediaries in the housing market, some of the costs like those
associated with delays in completing the transactions, are difficult to capture. Such details can only be
obtained from actual buyers, rarely the agents.

The three main components of cost that the survey has focused on are:

1. TC: duties and fees and other charges to complete the transaction
2. Finance Cost: Application fee, processing fee, pre-EMI (Equated Monthly Payment) costs and expenses other than interest and EMI expenses involved in obtaining a loan for the transaction.
3. Cost of land, construction of property and other development charges.
   

In the case of TC, the respondents have provided information on stamp duty, registration fee, other charges to be paid to the government, broker's fee and other fees and charges. In the case of the other two components, namely, finance costs and capital costs, further disaggregation has not been consistent across various respondents and therefore, we have not provided such disaggregation.

While significant decomposition of the cost has not been possible, there is considerable 'spread' of information. For example, information is available for residential and commercial properties, especially in urban areas. The survey also provides estimates for 'new property' and 'resold' transactions. It also helps us to compare the information from property dealers and finance agencies.We have provided detailed estimates of the composition for the states and cities covered in the survey in the Annexures of the report.

We now provide a summary of the findings of the survey. The findings are presented in the following sub-sections:

1. State-wise estimates of composition of total cost of transaction in terms of TC, finance cost and capital cost.
2. Citi-wise estimates of composition of total cost of transaction as in the case of item 1 above.
3. State-wise estimates of composition of TC in terms of stamp duty, registration charges, and other fees payable to the government, broker's fee and other costs.
4. City-wise estimates of composition of TC in the same manner as item 3 above.

The above information is examined for variations across types of property- new or resold transaction,
urban or rural, residential or commercial- wherever adequate data are available. The analysis is also extended
to cover the type of respondent: property dealers and developers in one group and housing finance agencies
in the other group. Detailed state-wise and city-wise estimates of the structure of costs of housing properties
are given in Annexure-II Tables A4.1.1 through A4.2.35.

4.1 COMPOSITION OF TOTAL COST OF HOUSING PROPERTIES

Taking an example of a purchase of a house by an individual for residential use, the total cost of the housing property would include all the costs incurred in the search for a property, its due diligence checks, processing all the documents and payment of taxes and charges to the government agencies, capital costs and costs involved in getting a loan if necessary. The capital costs would include the cost of land, cost of construction of the building and other associated external amenities such as parking lots. It is generally assumed that a piece of housing property would have all the amenities necessary to make living possible. In other words, access to water, electricity, and drainage are taken for granted at the time of acquiring the property. In exceptional cases, there may be transactions where some of these facilities are yet to be made available.

In the present study, we reiterate the point that the responses here are from intermediaries who have facilitated transactions and not from the buyers of the properties themselves.To this extent, some of the costs incurred by the buyers may not be fully captured.

We consider three main components of total cost:TC, financing cost (FC) and capital cost (CC). The average of the shares of these components in the total cost has been summarised across all observations for a summary analysis. The composition of total cost has been presented in Table 4.1.1 for residential properties and in Table 4.1.2 for commercial properties.

4.1.1 Price Structure of Residential Properties

The survey revealed that capital cost and TC respectively account for 90 and 10 per cent of acquisition
costs. The finance cost31 component is relatively small, less than 1 per cent of the total. This aggregate cost
structure pattern is not significantly different between urban and rural properties. The study analysed the
cost or price structure by differentiating between new and resold properties and transactions facilitated by
property dealers and developers as one group and transactions facilitated by housing finance companies and
commercial banks as the other group.

Urban and rural houses

On the average,TC have a higher share of the total cost of urban houses while the proportion of finance
costs is higher for rural properties. The magnitude of differences, however, is very small in both the cases. In
the case of capital costs there is no significant difference in its share in total cost, between urban and rural
properties.

If we distinguish between new and resold properties, new properties have higher shares of transactions
and finance costs in urban areas as compared to rural areas. Comparisons also reveal that new properties
have higher transactions costs, while the resold properties have higher finance costs in rural areas. The difference
in both cases is notable.Transactions costs account for 10.18 per cent in new and 8.67 per cent in
resold property transactions. The difference is more striking in the case of finance costs. The percentage
share of finance cost in total cost is three times higher for resold properties as compared to new rural properties.

The new properties would be expected to have a different structure of the capital costs than the old
properties. However, information was not collected on the age of the property. If the property were fairly
old, then the appreciation or depreciation of the property value would be capitalised in the total value of
transaction leading to higher valuation and a lower share of transactions cost.

31. Excluding interest charges.

In the previous study by the NHB cited earlier (NHB, 2007), transactions cost was estimated between
7.6 and 27.6 per cent of the capital cost. Given our estimate of capital cost at about 90 per cent of the total
cost,TC in the present study works out to 10.6 per cent of the capital cost.

To summarise, the estimates presented in Table 4.1.1 do show that the share of TC in total cost is slightly
higher for new property transaction than in the case of resold in both the rural and urban areas. The difference
in the share of TC in total acquisition cost between new and resold properties is sharper in the rural
areas than in the urban areas.

Differences in the price structure across types of intermediaries in property transaction

TC can be expected to vary with the type of intermediary chain that the consumer or buyer follows in
the house property transaction. In principle, taking a loan from a housing finance agency does not necessarily
eliminate the need for a broker in the transaction. However, a few housing finance companies and commercial
banks have started assisting their borrowers to locate suitable property by charging relatively lower
fees. Some others have tie-ups with property brokers and developers to help their borrowers with suitable
services. This aspect seems to be resulting in an important difference in the structure of TC for the house
buyer. Alternatively, the buyer may have already accomplished the search and other associated steps in the
acquisition of property and hence these costs are not reported.

As can be seen in Table 4.1.1, the share of TC in the case of responses from property dealers/ developers
is lower by 1.4 percentage point as compared to the case of responses from housing finance agencies. The
difference is greater in the resold properties in the urban areas than in the case of new properties. The difference
is sharper in the rural transactions than in the urban transactions.

The share of finance cost, in contrast to the above trend, is greater in the case of transactions reported
by the housing finance agencies than in the case of transactions reported by the property dealers/ developers

The estimates show that there can be significant variations in the structure of costs depending on the
particular process that is followed by the consumer. The cost would clearly be related to the requirement of
the intermediary services. In the case of transactions where the buyer approaches the housing finance agency
for financing, the need for a broker may be lower than in the case where the consumer has to shop around
for a property to buy from another seller.

The estimates show that TC may go up to 10 per cent of total cost of the property if the transactions are through property dealers/ developers than through a housing finance company or commercial bank. In the latter case, the share of TC in total cost is 9 per cent.

The finance costs are relatively higher in the case of transactions reported by the housing finance agencies.
The financing costs such as processing fee, application fee and other charges have been reported to be
about 2 per cent of the value of the loan (IPIRE, 2007).32 If the actual loan amounts are lower than the full
value of transaction, then the lower share of finance cost in the total TC as indicated in the survey result is
likely.

4.1.2 Price Structure of Commercial Properties

The findings summarised in Table 4.1.2 show that price structure patterns observed in the case of residential
housing properties hold good for commercial properties also. Urban properties have significantly
higher transactions cost but lower finance cost as compared to commercial properties in rural areas. The
share of TC in total cost is higher in the case of new properties than in the case of resold properties in both
urban and rural areas. The share of FC is also higher in urban new property prices as compared to that of old
properties. As for rural properties,much similar to the residential properties, FC has higher share in acquisition
cost as compared to urban areas.

If transactions are distinguished by type of intermediary, FC has greater and TC has smaller share in
the case of urban transactions reported by the housing finance agencies as compared to the transactions
reported by property dealers/developers However, the same doesn't hold good in the case of rural properties.
The shares of both TC and FC are relatively lower in the case of properties facilitated by property dealers
and developers

Although the differences are not significant in all the cases, the estimates do point to the fact that there
are differences in the price structures of new and resold properties. This is seen across rural and urban properties
as well as new and resold properties. The differences are also manifested depending upon the type of
intermediary. FC and some other intermediary services are significant part of the cost of transaction in
housing property.

32. India Properties Institute of Real Estate, "Property Matters Made Easy", Pune, 2007.

Table 4.1.1: Composition of Total Cost to the Buyer: Residential Properties (%)

Note: TC= TC, FC= Finance cost, Cap cost= Capital cost
* Information obtained on some property transactions did not specify if the transaction is new or
resold. Therefore, these transactions are included in 'ALL' category while they are not counted as
either new or resold categories.

4.2 COMPOSITION OF TRANSACTIONS COST OF HOUSING PROPERTY

As outlined elsewhere above, the transactions cost consists of statutory and professional fee components. The statutory transactions costs are stamp duty, registration and other statutory fees that in turn comprise of land conversion charges, transfer and mutation charges, and others. The professional TC comprises brokerage, document preparation charges, due diligence, society transfer fees and others. With the TC accounting

Table 4.1.2: Composition of Total Cost to the Buyer: Commercial Properties (%)

Note: TC= TC, FC= Finance cost, Cap cost= Capital cost
* Information obtained on some property transactions did not specify if the transaction is new or
resold. Therefore, these transactions are included in 'ALL' category while they are not counted as
either new or resold categories.

for about 10 per cent of the total cost of housing property to the buyer, it is important to examine the relative importance of its different elements.

4.2.1 Residential Properties

In both urban and rural areas, stamp duty accounts for bulk of the TC. In the urban areas, it works out to 70 per cent of TC and in rural areas about 65 per cent. The statutory transactions cost (stamp duty, registration fee and other fees imposed by government agencies), makes up more than 80 per cent of the TC in both rural and urban areas. This implies that more than 8 per cent of the total cost paid by the buyer goes towards these statutory transaction fees. The other taxes paid in terms of taxes on inputs for construction and for obtaining various permissions from the local government authorities as well as the taxes to be paid in future as wealth tax and so on are not accounted for in this estimated payments to government agencies.

Urban vs. rural residential housing properties

Stamp duty share in TC is higher in urban areas while the share of registration fee is more than 1 per cent higher in rural areas.Other statutory costs have a share of 3 per cent in TC of urban properties. The same is 5 per cent in the case rural properties.

New properties have lower share of stamp duties and higher share of registration fee in TC in urban areas. In the case of rural properties the share of stamp duty is similar in both new and resold properties. As regards the professional charges component of TC, broker's fees work out to be the most important component of it. Its share ranges from 65 to 80 per cent of the professional TC.The survey reveals that brokers charge relatively higher fees for facilitating resold property transfers as compared to that of new properties.

Structure of transactions cost by type of intermediaries

It is noticed that the statutory transactions cost has relatively lower share in total TC if a property brokers facilitate the transaction. However, in such instances, the share of professional transactions cost has higher share.

These patterns reveal that in the case of new properties and those where housing finance agencies are involved directly, the involvement of brokers is relatively less significant.

4.2.2 Commercial Properties

Table 4.2.2 presents the decomposition of TC in the case of commercial properties. Relative to the residential properties, the share of stamp duty and registration charges is smaller in the case of commercial property transactions. As compared to a share of 70 per cent in the case of residential properties, the stamp duty accounts for 67 per cent of the TC in the commercial property transaction in the urban areas.

The share of broker's fee is significantly lower in rural areas than in the urban areas.However, we should also note that the number of transactions on which data were available for rural commercial property transactions is very small and may not be adequate for strong conclusions.

Table 4.2.1: Composition of TC: Residential Properties (%)

Note: * Information obtained on some property transactions did not specify if the transaction is new or resold. Therefore, these transactions are included in 'ALL' category while they are not counted as
either new or resold categories.

As may be expected the broker's fee becomes more significant component of TC in the case of resold properties
rather than new properties. The transactions reported by housing finance agencies also give a smaller
share of broker's fee in TC.Table 4.2.1 provides a break- up of the TC for residential property transactions.

Table 4.2.2: Composition of TC: Commercial Properties (%)

Note: * Information obtained on some property transactions did not specify if the transaction is new or resold. Therefore, these transactions are included in 'ALL' category while they are not counted as either new or resold categories.

Statutory TC are imposed on the declared value of the property at the time of registration of the property. The system provides incentives for undervaluation, as it would reduce the tax burden to the buyer. This problem is addressed to some extent by revising the circle rates, which define the minimum value of property prices, at regular intervals. The professional transactions costs, as noted earlier, are paid on the actual transaction value of the property as against the registered value. The real estate broker's fee is the main element of this category of costs.

4.3 PATTERNS OF PRICE STRUCTURE ACROSS STATES AND CITIES

The overall estimates of the price structure of housing properties have shown that TC account for about 10 per cent of the cost of the property. Both urban and rural housing property transactions conform with this pattern. In the previous section it was also noticed that stamp duties turn out to be the most prominent component of the TC. Do these patterns vary across states and cities? In this section, we briefly point to these patterns.

Composition of total costs: urban residential vs. urban commercial

Figure 4.1 illustrates the composition of total cost across states for urban residential properties. Figure 4.2 depicts the same information for urban commercial properties. In these figures the states are arranged in ascending order of share of TC.They point to substantial variations in the share of TC in total cost across the states. The figures also reveal an interesting pattern. The TC are generally more prominent in the total price of the property in the relatively economically weaker states than in the stronger states. For example, UP, MP and Orissa are among the top five states in terms of the share of TC in the total cost of urban residential properties. Kerala and West Bengal top the list although they are not among the 'low performing states' in terms of overall income levels. The states of Gujarat, Maharashtra, Haryana and Punjab, the 'stronger states' have lower TC relative to total cost. One possible reason for this result is the fact that the property prices in general are higher in these better off states and the transactions cost turns out to be relatively lower.

The pattern is similar for both residential and commercial properties in the urban areas.

Composition of total costs: new vs. resold urban properties

Figure 4.3 reveals the differences in share of transactions cost in total cost between new and resold urban residential properties across states. Figure 4.4 reveals the same for urban commercial properties. It can be noticed from Figure 4.3 that except in Haryana, Punjab and Kerala, new properties have higher shares of transactions cost as compared to 'resold' properties. In the case of urban commercial properties, TC have higher shares in resold properties as compared to new properties only in Orissa, UP, Uttarakhand. Therefore, the share of TC in total cost is relatively greater in the case of 'new' properties than in the 'resold' properties.

One explanation for this pattern of TC across new and resold properties is the higher taxes and fees for 'new' transactions as compared to 'resold' properties. Another explanation for the pattern may be the greater need for intermediaries in the transactions involving the purchase or sale of new properties which in turn increase the TC.We explore these issues through a decomposition of the TC.

Stamp duties: new vs. resold urban properties

We examine the share of stamp duty in the TC in the 'new' and 'resold' properties in the urban residential and commercial sectors in Figures 4.5 and 4.6. The share of stamp duty in TC does not show strong correlation with the 'economic performance' of the states. However, the share of stamp duty in TC is relatively low in the case of Maharashtra,Gujarat and Karnataka and high in the case of MP, UP and Bihar. The pattern is more complex in commercial property transactions.

Thus, it is not the stamp duties alone that lead to high TC in the relatively weaker states, but other fees and charges are equally responsible.

Figure 4.1: Pattern of Variation in the Composition of Total Cost across States for Urban Residential Properties

The pattern of incidence of stamp duty relative to TC has been examined in the case of 'new properties' as compared to the 'resold properties' in Figures 4.7 and 4.8. The stamp duty as a percentage of TC is lower

Figure 4.2: Pattern of Variation in the Composition of Total Cost across States for Urban Commercial Properties

Figure 4.3: Pattern of Variation in the Composition of Total Cost across States for Urban Residential Properties: New and Re-sold Properties

in a majority of the states considered here in the case of 'resold' transactions as compared to the 'new' property transactions. The pattern is similar in the case of commercial properties although the data points are small in number to draw stronger conclusions.

Figure 4.4: Pattern of Variation in the Composition of Total Cost across States for Urban Commercial Properties: New and Re-sold Properties

Figure 4.5: Pattern of Variation in the Composition of TC across States for Urban Residential Properties

Figure 4.6: Pattern of Variation in the Composition of TC across States for Urban Commercial Properties

Figure 4.7: Patterns of Variation in the Share of Stamp Duty as % of TC across States for Urban Residential Properties: New vs. Re-sold Properties

Figure 4.8: Pattern of Variation in the Share of Stamp Duty as % of TC across States for Urban Commercial Properties: New vs. Re-sold Properties

The variation in the stamp duty across states is significant. For a comparison of these actual duties, we have summarised the information available from various sources on the actual rates in Table 4.3.1. The information also confirms that the stamp duty on transactions in rural areas is lower than in urban areas in a number of states.

Duration of the transaction

The time taken to complete the housing property transaction is a part of TC. In the present survey, we have attempted to assess the time needed to complete one phase of housing property transactions. We define the duration for transaction as the time gap between the sale agreement and sale deed execution. It therefore excludes search costs and other due diligence process. The duration captured here reflects the time taken for completing the statutory process.

In the case of new properties, normally a buyer enters into agreement for purchase with the developer at the time of booking. The agreement is executed only when the construction of the house is completed, generally between two and three years. In the present study, however, the information sought is limited to the time taken to complete the housing property transfer process and not the construction time of the property. Therefore, only the resold property information is analysed for this purpose.

Table 4.3.1: Stamp Duty Rates across States

Source: Various sources such as state government websites, information collected from state governments during the survey.

As can be noticed from Table 4.3.2, completion of housing property transactions takes more time (eight days on average) in rural areas than urban areas. In urban areas, there is no difference in the duration between residential and commercial properties. However, if HFCs or commercial banks mediate the transaction, commercial property transactions take six days more time than residential properties.

Table 4.3.2: Duration of the Transaction (No. of days )

The total time taken for the process of acquisition to be completed even after the sale agreement is signed, is about 45 days.

4.4 STRUCTURE OF TRANSACTIONS COST AND TOTAL COST : A COMPOSITE VIEW

We now present an analysis of the incidence of stamp duty as a proportion of TC and TC as a proportion of total price (cost) of housing properties emerging from the present survey.Tables A4.1.1 to A4.4.35 given in Annexure II contain the figures that form basis for this analysis. The information contained in these tables is further summarised in Tables 4.4.1–4.4.6 at the level of states and Tables 4.4.7 to 4.4.12 at the level of cities. The summary tables are two-way tables that synthesise the structure of TC and structure of total price of housing properties together.

The state-level patterns

Three broad trends emerging at the state level from the transactions cost information collected from the survey are:

(a) Stamp duty and TC account for the highest percentage of property prices of both commercial and
residential properties in UP and MP as compared to the other states.
(b) Stamp duty and TC, as a proportion of Cost, are among the lowest in Karnataka, Maharashtra and
Gujarat for both commercial and residential properties

Urban residential properties

• HP, Maharashtra, Karnataka and Gujarat have relatively lower incidence of stamp duties and lower TC in the Cost.
• On the other hand, it is observed that UP and MP have relatively higher stamp duties and higher TC in Cost.
• If we distinguish between new and resold properties in HP, Maharashtra, and Karnataka states, the incidence of stamp duty and TC is lower for new properties.
• In the case of urban residential resold properties, Maharashtra and Gujarat have the lowest TC.
• UP and Uttarakhand have both highest stamp duty and highest TC relative to Cost.

The general patterns that we referred to earlier with respect to the overall economic situation of the states and the TC in housing property price are reinforced here in this analysis.

Table 4.4.1: Stamp Duty and TC across States: Urban Residential - All Properties

Table 4.4.2: Stamp Duty and TC across States: Urban Residential - New Properties

Table 4.4.3: Stamp Duty and TC across States: Urban Residential - Re-sold Properties

Urban commercial properties

• Maharashtra, Karnataka and Gujarat have relatively lower percentage of stamp duties and lower TC.
• Uttar Pradesh and Madhya Pradesh have higher stamp duties and higher percentage of TC.
• In the case of resold properties, in addition to Gujarat and Maharashtra, Haryana also has shown rela tively lower TC.

Table 4.4.4: Stamp Duty and TC across States: Urban Commercial - All Respondents

Table 4.4.5: Stamp Duty and TC across States: Urban Commercial - New Properties

Table 4.4.6: Stamp Duty and TC across States: Urban Commercial - Re-sold Properties

The city-level patterns

The two-way analysis of TC is extended here to the patterns emerging at the level of the cities for which data have been collected.While there is no information on the general economies of the cities, the similarity of patterns over a large number of cities would help in generalising some of the trends observed earlier.

Urban residential properties

• City-wise tables reveal that Udipi in Karnataka, Greater Mumbai and Pune in Maharashtra and Mehsana and Surat in Gujarat have shown lowest percentage of stamp duty and TC. Shimla and Amritsar also show similar trends.
• Bhopal, Gwalior, Roorkee, Lucknow and Kanpur have the highest share of stamp duty and TC in the Cost of properties.

Table 4.4.7: Stamp Duty and TC across Cities: Urban Residential - All Respondents

Table 4.4.8: Stamp Duty and TC across Cities: Urban Residential - New Properties

Urban commercial properties

• Urban commercial property price structure has the lowest percentage of TC and stamp duty in Karnataka, Maharashtra, Haryana and Punjab.
• On the other hand, commercial property transactions face higher percentage of stamp duty and TC in Kerala, Orissa and M.P.
• There is similarity in trends in the case of new and resold commercial properties.

The detailed tables on the survey are provided in Annexure II. These tables present the state-wise and city-wise estimates of the cost structure of housing properties as obtained from the present survey. We should point out that the number of observations or data points necessary for estimating disaggregated cost at each city level is often not adequate.To indicate the limitation on this account we have also given the number of observations (transactions) on the basis of which the cost composition has been estimated.

Table 4.4.9: Stamp Duty and TC across Cities: Urban Residential - Re-sold Properties

Table 4.4.10: Stamp Duty and TC across Cities: Urban Commercial - All Respondents

Table 4.4.11: Stamp Duty and TC across Cities: Urban Commercial - New Properties

Table 4.4.12: Stamp Duty and TC across Cities: Urban Commercial - Re-sold Properties

4.5 DETERMINANTS OF TRANSACTIONS COST

In the backdrop of the above findings, we now provide through regression analysis an assessment of the significance of the association between TC and their determinants.Two single equation multiple linear regrsion models are estimated to examine the statutory transactions costs, and professional transactions costs separately (Table 4.5.1).

The list of explanatory variables used for this purpose includes property location (urban/rural), property status (freehold/leasehold), type of property (residential/commercial), type of buyer (individual/firm), property seller (individual/firm), gender of the buyer in case of individual, type of property (new/resold), transaction value, and per capita net state domestic product. The dependent variable is logarithm of statutory TC. The results of the estimated regression models are:

These results indicate that statutory TC varies positively with the value of the property in about the same proportion. Progressive states- the states with higher per capita net state domestic product- impose lower statutory duties as compared to the others. The results pertaining to location, property status and type of buyer do not show statistically significant impact of these characteristics on the statutory transactions cost.

As for the sellers category, statutory TC paid on properties bought from firms are higher by 5 per cent than what is paid on properties bought from individual sellers The results also confirm incidence of higher statutory fees for new houses (6 per cent on average) as compared to resold houses. It can also be noticed that the incidence of statutory fees is more in case of property transactions facilitated by commercial banks and housing finance companies. The results also indicate that statutory transactions costs paid are relatively lower in the case of commercial properties as compared to residential properties. All these results are robust and confirm to the patterns observed earlier.

Professional fees in TC

The linkage between different property attributes and professional fees/ charges involved in TC are different from that observed in the case of statutory TC. In this case, only transaction value, state per capita GDP, location, and types of respondent are statistically significant determinants of professional fees/ charges. As for the direction of impact and robustness of individual explanatory variables, there is a significant difference between statutory and professional TC. The estimates are given in Table 4.5.2 .

Table 4.5.1: Determinants of Statutory Transaction Fees: Regression Results (Dependent Variable: Logarithm of Statutory Transactions Cost)

Adjusted R square=.79; Method of estimation: OLS
Note: Constant stands for the intercept of the model. Value is the transaction value of the property in
logarithms, pcnsdp stands for percapita state net domestic product in logarithms, location stands for
urban/rural ( urban=1, rural=0), status_fhld stands for freehold status of the property (freehold=1,
leasehold=0). Buycat stands for type of buyer (individual=0, institutional=1), selcat2 represents dummy
variable for a seller (individual=0, firm=1), new stands for new or resold of property (new=1, resold=0).
Respondent indicates respondent category (banks&hfcs=1,dealers&developers=0), prop-typ stands for
residential/commercial (residential=1, commercial=0).
(Level of significance for each coefficient: *** for 1%, ** for 5%, * for 10%)

Table 4.5.2: Determinants of Professional Fees/ Charges in TC: Regression Results (Dependent Variable: Logarithm of Professional Transactions Cost)

Adj. R square=.49 Method of estimation: OLS
Note: Definitions of independent variables remain the same as given in the note to Table 4.5.1.

Sensitivity of registrations to stamp duty rate changes

Given the importance of stamp duty and registration fee in the total cost of the property reforms in this
area to bring down these costs would be important for the development of the housing sector as a whole. In the
present study, there is no data to examine the sensitivity of the transactions to the level of stamp duty. Based on
other available studies we provide an assessment of the prevailing conditions based on other available studies.

We first cite here two relevant studies that have dealt with this issue. The first of these two studies was
conducted by Alm, et al in 2004 for the World Bank33. The study attempted to assess the revenue effects of
reforms in stamp duties that lead generally to lower tax rates in different states.

The study analysed the levels of stamp duty collections and how revenues from them varied between
states. It observed that states like West Bengal and Maharashtra who have reduced stamp duty rates in
recent years witnessed higher revenues from this source. The study found that in several other cases, revenues
actually increase in response to a stamp duty rate reduction. The rate of increase in stamp duty revenues
(except in Kerala) is less than proportional to stamp duty rate cuts. A slightly negative relationship
between rate changes and revenue changes was also noticed from the regression exercise carried out by the
study indicating that stamp duty reduction would lead to higher revenues implying that either the number
of transactions would increase or that the value of transactions would increase.However, the statistical models
are not robust, as the explanatory power of stamp duty rate changes is low.

The Alm, et al. study also mentioned the findings of two other relevant studies. The first of these is that
of Das Gupta (2002) on Karnataka, who found that a 1 per cent increase in the effective tax rate led to a 0.6
per cent decrease in revenues for the period 1980-1981 to 1997-1998. The second of these two studies is
that of World Bank (2000). This latter study found that when the stamp duty rate in Rajasthan was lowered
from 12 per cent to 7 per cent in 1996-1997, state revenues from stamp duties increased by 36 per cent
between 1996-1997 and 1998-1999.

Srivastava and Kumari (2006)34 report their findings of a study in the wake of reduction of stamp duty
rates from 17 per cent to 5 per cent in June 2004 in Jharkhand.

Subsequent to the reduction of stamp duty rates in Jharkhand, revenue collected from stamp duties fell
by 11.4 per cent in 2004-05. However, in the following year it increased by 3.9 per cent. As for the number
of registrations, there was a 14.71 per cent increase in 2004-05 as compared to (-)1.2 per cent and 5.9 per
cent in the two previous years (Table 4.5.3).

33.1. Alm, J. A Annez, P., and Modi, A., (2004) 'Stamp Duties in Indian States: A Case for Reform', World Bank Policy Research Working Paper 3413, September 2004.
34.Srivastava, R. and S. Kumari (2006) 'Impact of Reduction of Land Registration Rates on Revenue Generation in Jharkhand', March.

The change in number of documents registered was around 6 per cent in 2002-03, which turned to (-)
1.2 per cent in 2003-04. However the following year, i.e. the year of reduction in rates, witnessed a jump in
the number of registrations by 14.71 per cent. This may be interpreted as the positive impact of reduction of
stamp duty rates on number of documents registered. Contrary to this, in 2005-06, the number of documents
registered reduced by 1.74 per cent in spite of the low rates still being applicable. On the basis of
these findings, the study opined that there is no consistent and stable impact of reduction in rates of land
registration on number of documents registered. This indicates that there are a host of other factors that
effect registration of properties. The study has calculated that the elasticity of registration with respect to
stamp duty rates35 was less than unity i.e., the percentage change in the number of registrations is less than
the percentage change in the stamp duty rates. However, it may be noted that despite a fall in the number of
registrations by 1.74 per cent in 2005-06, the number of registrations were considerably still more than
those of pre duty cut period.

Table 4.5.3: Number of Documents Registered in Jharkhand*

* All types of registration documents. In Jharkhand, about 95 per cent of instruments of registration
relate to land but disaggregate figures are not available. Source: Srviastava and Kumari (2006).

The outcomes of the above two studies show that high stamp duty rates strongly discourage real estate
transactions and thus impede the development of efficient and flexible urban real estate markets. From the
revenue point of view the benefits of lower stamp duty have not been established very clearly, but the impact
on number of registrations and therefore housing development is more clear. The duty reductions have led
to more reported transactions.

Now, we present here limited information collected in the present study in Table 4.5.4. As can be
seen from the above table, there is variation in the number of property registrations over time. Stamp
duty rates have been left unchanged (10 per cent of the value of the consideration) since 1998-99 in the
case of Uttar Pradesh. Similarly, the 7.5 per cent of stamp duty rate dates back to 1998-99 in Madhya Pradesh. Though the number of registrations is increasing, the opposite is also noticed in some cities.
Similarly, the study could get information from three cities in Haryana. It could be seen that trends in
both the number of registrations and amount collected by imposing stamp duties on these registrations
are not uniformly positive.

35.Percentage change in no. of document registered divided by percentage change in rates of property registrations

Table 4.5.4: Number of Property Registrations and Amount Collected From Stamp Duty

Notes: *till November 2007. ** till 25.03.2008. @ till 19.03.2008. NA stands for not availability of information.

Apart from stamp duty, there are a number of other factors that affect registration. The change in circle
registration rates also play equally important role. Stamp duty rates are changed once every few years, whereas
circle rates are changed more frequently – every year or every two years.
The sensitivity of housing market transactions to stamp duty levels is an important parameter influencing
development of the housing market. The present study has not been able to analyse this issue based on
the survey data. It would be valuable to supplement the World Bank study of 2004 using city-specific information
on stamp duty levels and the number of registrations over time.Not much was done in the course of
the present study to collect this information. More time and effort would be required to obtain this information
from the offices of the Registrar of Properties in the respective districts. The implication of varying
levels of stamp duties over a period of time could be analysed better when the survey is focused on actual
sellers and buyers.

4.6 THE HOUSE ACQUISITION PROCESS

We attempted to map the process of acquiring housing properties by checking a standard acquisition
process with the respondents, in this case property brokers and housing finance agencies. For this purpose,
the flow chart of house acquisition process presented in an earlier study of the National Housing Bank was
utilised36. The present study found that the process of acquiring a housing property in urban areas is broadly
the same across states and cities. However, a few exceptions were also noted. The role of property dealers is
either nil or negligible in the rural areas. Besides, there are no property developers there. In the villages,
property sale-purchase is often a two-party activity (buyer and seller). Figures 4.9a-4.9b reveal the housing
acquisition process in urban areas and study outcomes with regard to different aspects of this process.

Figure 4.9a: Process of Housing Property Acquisition

36. National Housing Bank (2008), Transaction Costs of Housing in India: An Analysis, Occasional Paper No.II, New Delhi.

Figure 4.9b: Process of Housing Property Acquisition through Housing Loan

5. SUMMARY AND RECOMMENDATIONS

This study has focused on the costs of transaction of housing properties, both residential and commercial,
in rural and urban India with the objective of assessing the extent of such costs in housing property
transactions. The analysis is based on data obtained from a sample survey of property dealers/developers,
housing finance agencies and select nationalised banks in 16 states and 45 select cities. The purpose is to
estimate the TC (including stamp duty and other government levies and taxes) and finance costs, as both
TC and finance cost tend to push up the cost of the property and could contribute significantly to the decisions
of both buyers and sellers of housing property. In addition, high government duties/taxes and finance
costs could introduce significant inefficiencies in the housing market and contribute to the generation of
black money in the economy.

The study has provided a comprehensive review of the fiscal and legislative frameworks within which
transactions in housing properties take place. The review has pointed to the need for assessing policies that
influence the 'returns to investment' in housing and may distort the availability of housing for the poor.
While housing sector is experiencing remarkable buoyancy in the recent years, it is important to keep in
view whether the growth is succeeding in bringing housing to all sections of the society.

An analysis of the data collected from various agencies suggests that TC comprises about one-tenth of
the value of the property. Thus, for every Rs 10 lakh transacted, Rs 1 lakh is spent without adding any value
to the property. Though there are various types of exemptions and discounts on the fees and duties for different
categories of buyers and sellers, the incidence of TC in housing property markets is significant.

The costs estimated in this study refer to the costs incurred in cash by the buyers. The survey also shows
that stamp duty alone constitutes 65-70 per cent of the TC. As far as residential property is concerned, there
is not much difference in the percentage of TC in rural and urban areas. However, some variations are
observed across states and cities.

The TC in the case of new properties tend to be slightly higher when compared to those for resold of
properties. Another feature indicated is in regard to the TC which tend to be higher by almost 1 percentage
point for the transactions through the property dealers/developers when compared to transactions done
through the housing finance companies. The difference is somewhat greater for urban properties. A further
analysis reflects the fact that a part of the TC goes towards compensating intermediaries for the services
provided by them.

In the case of commercial properities, the TC is estimated to be slightly lower (67%). The fee charged
by the broker is about 15 per cent of the total TC with some variation between residential and commercial
properties, between new and resold properties and between large and small properties.

An analysis of the pattern of variations across states and cities points to some important trends. For
example, the TC as a percentage of Cost tends to be higher in relatively 'economically weaker' states than in
the 'better off ' ones. One reason for this may lie in the fact that the overall price of the properties in the 'better
off ' states may be higher than that in the economically 'weaker' states. However, the finding still points
to the possibility of using taxes and duties to reduce the TC in the states, so that the overall cost of housing
property could be reduced.

It is also important to note that it is not the stamp duties alone that raise the TC.Other government
levies play an equal role.

The study also points to similarities in the composition of prices in urban and rural areas.

The analysis at the state and city level points to substantial variation in the composition of cost or the
'price structure' of properties. Some of the components vary in proportion to the underlying 'price' of property,
as in the case of stamp duty.Others may have some fixed levels of charges.

The price or cost of housing property varies significantly across each property for a variety of reasons.
The present study has attempted to provide estimates over a variety of situations and these would be useful
for providing an understanding of the actual conditions prevailing in the housing sector today.

Some of the key recommendations based on the present study are:

• With a 10 per cent share in the total price tag of a property, TC is a significant part of the cost of acquiring
a house. However, the broker's fee does not include the expenses incurred for carrying out 'search'
of the property. It also does not include the costs due to delays in getting necessary clearances from the government agencies before the transaction could be completed. The study estimates that about 40 days
are needed to complete the process of execution of the sale deed from the time of signing the sale agreement.
Delays may occur due to the time taken to bring the deal to financial closure and to complete the
necessary legal process. It is necessary to make the legal process as efficient as possible.
• An indication of the significant levels of TC is the reported undervaluation of properties to reduce tax obligations.
Stamp duty being the largest component of TC, there are incentives to under-report property
prices. The high duty levels also have a cascading effect as these are applied at each sale. Stamp duty is
paid on both the purchase of land and also on the price of the property. There is a need to rationalise
these rates on a 'value added' basis.
• Reduction in the duty levels could help in promoting the development of the housing sector by making
entry into the property market more affordable to individuals. Stamp duty levels are anyway higher in
India than most other countries. Empirical evidence on the revenue effects of stamp duty reduction is not
well established, but studies do point to the correlation between the growth in the number of registrations
and reduction of stamp duty. It is necessary to harmonise the rates and bring them down in order
to make the housing market more inclusive.

• The provisions of the Rent Control Act and ULCRA led to considerable restrictions on the growth of the
housing market. Though these acts have been liberalised and done away with in most states, the liberal
provisions often cover only the new properties. It is necessary to bring the old properties also under liberal
provisions.
• It is necessary to create a positive environment for the development of housing property markets. It is
necessary to have efficient systems of record keeping and open up buyer-seller access to these records
The title and sale deed record offices should be brought together in one office.
• There should be clear understanding of the process of property transactions among the general public.
It should not be shrouded in legal processes and inaccessible government offices. Even information on
current stamp duties and other statutory fees on transactions in different states is not available in any
one official website. The advent of e-Governance should be fully exploited to make the process more
accessible. This would reduce the costs of due diligence and mitigate the uncertainty over ownership of
properties. The prevalence of 'power of attorney' transactions may point to the difficulties in legal transfer
of properties, some of which may be caused by the regulations that restrict transfer.
• The development of the institutional housing finance sector has catalysed demand for housing from people with high and middle-level income in the organised sector. It is necessary to develop financial products
for those in the unorganised sector as well. Reduction in intermediary costs would help the lowincome
groups and would go a long way towards realising the demand potential from this group.
• Benefits under the tax concessions for housing are essentially limited to the tax paying public. The others,
at the lower income group, would have to benefit from more efficient markets. This also implies that
the tax concessions would have to be limited to serve one- time housing requirements of individuals.
Rather than depend only on tax concessions, it would be more effective to have lower tax rates because
it would stimulate demand.
• Some TC are not visible to the buyers and sellers of properties as they are built into the prices. These
include the plethora of clearances and approvals needed to build a house. It is necessary to monitor the
working of these regulations and take steps to simplify the process. If revenue generation is the sole
objective of the government agencies, then it should not lead to restriction of economic activities.
Ineffective enforcement also implies scope for corruption.
• Assessment of housing property prices based on primary data is not common in India. So, the present
exercise has provided a number of valuable leads for studies of this type. Firstly, the respondents in the
present survey are the intermediaries in transactions rather than the actual buyers or seller. Some of the
costs such as 'bribes' or understatement of valuations cannot be fully captured through this approach.
Though there are no other approaches to fully address this limitation, information from actual buyers
and sellers is likely to be more complete. So, a survey of intermediaries should be complemented by one
of sellers and buyers.

• To fill the information gap collected in the present study, we believe that a case study of a few transactions
would be necessary. This would contribute to our understanding of the key areas where costs are
incurred to complete the transaction process. A study that captures the costs for the property developer
and the individual buyers and sellers would provide a fuller understanding of the TC. A metro city situation,
smaller cities and some rural transactions could be followed up. The study should also take up
cases of power of attorney transactions to assess the issues involved.

REFERENCES

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Policy Research Working Paper 3413, September 2004.
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Dasgupta, Arindam (2002), The Stamp & Registration Department in Karnataka: A Review of Institutions
and Administration, mimeo, Indira Gandhi Institute of Development Research, Mumbai.
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Real Estate, 31st October.
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Government of India, the Wealth Tax Act 1957,New Delhi.
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Amenities,New Delhi.

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Indian Cities,National Institute of Public finance and Policy Working Paper No. 39.
Lall, Vinay (2005), Country Experiences in Developing Real Estate Price Index, pp.1-12, Society for
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II, New Delhi.
National Housing Bank, Report on Trend and Progress of housing in India,Various issues,New Delhi
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Srivastava,R., and S.Kumari (2006), Impact of Reduction of Land Registration Rates on Revenue Generation
in Jharkhand, a Fiscal Policy Analysis Cell (FPAC) Project, Government of Jharkhand, March.
United Nations Habitat (2007), Enhancing Urban Safety and Security: Global Report on Human Settlements.
Wadhwa,D.C. (2002) "Guaranteeing Title to Land", Economic and Political Weekly,Vol. 37(47),November
23rd.
Wadhva Kiran,(1993) "Delhi Rent Control Act: Facts and Fallacies" Habitat International 17(1) pp. 103-
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Wadhva, Kiran (1983), "An Evaluation of the Urban Land Ceiling and Regulation Act- A case study of
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Wadhva, K. (2000), "Housing and Tenancy Legislation" in Misra, G.K. and P.S.N. Rao, eds. Housing Legislation
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ANNEXURE I
(FOR CHAPTER 2)

Table A2.1: Stamp Duty on Conveyance (in %) in Selected States*

*As applicable on February 19, 2007.
Source: National Institute of Public Finance and Policy (2007), Primary survey Data on Stamp Duty, New Delhi.

Table A2.2: Rates of Wealth Tax

Source: Government of India, the Wealth Tax Act 1957, New Delhi.

SURCHARGE ON WEALTH-TAX

The amount of wealth-tax computed in accordance with the provisions of this Part shall, in relation to
the assessment year commencing on the 1st day of April, 1988, be increased by a surcharge calculated at the
rate of ten per cent of such wealth-tax.

Table A2.3: Excise Duty Rates on Building Material (2006-07)

• 8% with Centvat on articles of wood
• 16% on mosaic tiles, glassware/glass lay flat tubing
• 16% on goods supplied for manufacturing of PD pumps for handling water
• The rate of compounded levy on stainless steel patti/pattas has been increased from Rs 15,000 per machine to Rs 30,000 per machine.
• Marble slabs and tiles would attract the applicable rate of Rs 30/m2
• Aluminum - 16%
• Paints and Varnishes - 16%
• Cement and Steel attract a VAT of 4%
• Withdrawal of exemption on goods manufactured without aid of power: Brick blocks/ceramic tiles & other ceramic goods
• Service tax rates imposed on registrar service & recovery agent services have been increased from 10% to 12%.

Source: government of India, Economic Survey 2006-07, New Delhi.

Table A2.4: Property Tax Rates in Selected Cities* (for Residential Practices)

*As of 2004.
Source: Government of India (2004), Reforming Property Tax, Ministry of Urban Affairs Research
Study Series no. 97, March.

Table A2.5: Housing Shortage - All India (Number in Million)

Sources:
1. For 1961 - 1991, Housing Statistics - An Overview - 1999, National Buildings Organisation,
Ministry of Urban Affairs and Employment, Government of India.
2. For 2001, Housing shortage has been estimated by Economics Cell, HUDCO as follows:
Excess of households over number of houses + Congestion + Obsolescence + number of unserviceable
kutcha houses.
3. Housing and Urban Development Corporation Limited (2001), Trends and Gaps in Housing and
Basic Amenities, New Delhi.

Table A2.6: Percentage Distribution of Houses by Type of Structure - All India 1961 - 2001 (as % of Occupied Houses)

Sources:
1. Housing Statistics - An Overview - 1999, National Buildings Organisation, Ministry of Urban
Affairs and Employment, Government of India.
2. Census of India - 2001 - Tables on Houses, Household Amenities and Assets.
3. Housing and Urban Development Corporation Limited (2001), Trends and Gaps in Housing and
Basic Amenities, New Delhi.

Table A2.7: Distribution of Households by Size and Number of Rooms Occupied, All India - 2001

Source: Housing and Urban Development Corporation Limited (2001), Trends and Gaps in Housing
and Basic Amenities, New Delhi
Census of India - 2001 - Tables on Houses, Household Amenities and Assets.

Table A2.8: Housing Price to Income Ratio

Source: United Nations Habitat (2007), Enhancing Urban Safety and Security: Global Report on Human Settlements.

Table A2.9: Households Staying in Rental Housing in India (in %)